Top

Published in:

2011 | OriginalPaper | Chapter

10. The Development of the European Electricity Market in a Juridical No Man’s Land

Author : Simone Pront-van Bommel

Published in: Financial Aspects in Energy

Publisher: Springer Berlin Heidelberg

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

Energy trade, including trade in energy derivatives, may entail various potential risks. Conceivably, these risks could jeopardize European Union objectives, such as consumer protection. Under the European Third Energy Package, which recently entered into force, Member States are required to confer new competencies upon national energy regulators to regulate this type of trade. This chapter elaborates on the sector-specific regulation of the financial aspects of energy trade, with reference to several types of energy contracts. It also deals with the overlaps and differences between this particular type of regulation and financial regulation in general. Furthermore, the article explores whether the current regulation of trade in energy derivatives is sufficient.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Technik"

Online-Abonnement

Mit Springer Professional "Technik" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 390 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Maschinenbau + Werkstoffe

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

previous chapter The EU Energy Policy After the Lisbon Treaty

next chapter Value Creation from Wood-Based Energy Sources

Pilipovic (2007).

Report of the De Larosière Group, 25 February 2009; Communication from the Commission, Ensuring efficient, safe and sound derivatives markets, COM (2009) 332 final, Brussels, 03.07.2009, p. 2.

E.g. Connecticut’s investigation of the State trash authority’s loss of $220 million in a failed deal with Enron: Zielbauer 2002).

U.S. Energy Information Administration (2002). “Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries”, SR/SMG/2002-01, pp. 29–31.

Federal Energy Regulatory Commission (2007).

U.S. Energy Information Administration (2002), p. 31: “In March and October 2001, for example, the FERC ordered California power wholesalers to refund tens of millions of dollars in overcharges.”

U.S. Senate (2007).

The Third Energy Package is a set of adjustments and new legislation for the directive of the European Parliament and of the Council amending Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity; for a directive of the European Parliament and of the Council amending directive amending Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas; for regulation of the European Parliament and of the Council amending Directive establishing an Agency for the Cooperation of Energy Regulators; for a regulation of the European Parliament and of the Council amending Directive amending Regulation (EC) No 1228/2003 and for a regulation of the European Parliament and of the Council amending Directive amending Regulation (EC) No 1775/2005, adopted on 3 September 2009.

It is pointed out by Jessayan (2009) that companies are being confronted with multibillion risks due to speculation. This author illustrates that the size of the trading activities in the energy business is many times larger than the size of the original core activities. Moreover it is argued that adequate supervision on the risks involved is largely absent. Energy companies only rely on their own internal risk management systems.

Communication from the Commission to the Council and the European Parliament, Report on progress in creating the internal gas and electricity market, COM (2010) 84 final, Brussels, 11.3.2010, p. 5 and 8.

Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ C 211, 14.8.2009, recitals 1–6, 37, 42, 45, 50; Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in gas and repealing Directive 2003/55/EC, OJ C 211, 14.8.2009, recitals 1–4, 43, 47.

The new directives of the Third Energy Package have to be transposed correctly by 3 March 2011.

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004, on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145 30.4.2004 (MiFID).

Art. 38(2) Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing directive 2004/39/EC of the European Parliament and of the Council as regards recordkeeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive, OJ L 241 1, 30.4.2004 (MiFID Implementing Regulation). It stipulates that a contract is not a spot contract if, irrespective of its explicit terms, there is an understanding between the parties to the contract that delivery of the underlying is to be postponed and not to be performed within the period mentioned in the first subparagraph. Art. 38(2)b stipulates further: “A spot contract for the purposes of paragraph 1 means a contract for the sale of a commodity, asset or right, under the terms of which delivery is scheduled to be made within the longer of the period generally accepted in the market for that commodity, asset or right as the standard delivery period”.

EFET (2007b). General Agreement, Concerning the Delivery and Acceptance of Electricity, Version 2.1(a)/ 21 September, par 8; EFET (2007a). General Agreement Concerning The Delivery And Acceptance Of Natural Gas, Version 2.0 (a)/11 May.

Hull (2009) and Marthinsen (2009), COM (2010) 84 final, p. 8.

Hull (2009); Communication from the Commission, Ensuring efficient, safe and sound derivatives markets, COM (2009) 332 final, Brussels, 03.07.2009, pp. 3–5.

Deng and Oren (2006); COM (2009) 332 final, pp. 3–5.

U.S. Energy Information Administration (2002), p. 31.

Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003, establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, OJ L 275, 25.10.2003. Amended by: Directive 2004/101/EC of 27 October 2004 L 338 18 13.11.2004, Directive 2008/101/EC of 19 November 2008 L 8 3 13.1.2009, Regulation (EC) No 219/2009 of 11 March 2009 L 87 109 31.3.2009, Directive 2009/29/EC of 23 April 2009, L 140 63, 5.6.2009.

In line with Article 32, Directive 2003/87/EC, this directive entered into force on the day of its publication in the Official Journal of the European Union, 25 October 2003.

See Art. 2 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC to improve and extend the greenhouse gas emission allowance trading scheme of the Community, OJ L 140, 5.6.2009. See also: COM (2008) 16 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, COM (2008) 16 final, Brussels, 23.1.2008.

Directive 2009/72/EC, recitals 4 and 39; Directive 2009/73/EC, recitals 4 and 36.

Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity, COM (2007) 528 final, Brussels, 19.9.2007, p. 8–9; Commission Staff Working Document, Accompanying the legislative package on the internal market for electricity and gas, Impact Assessment, SEC (2007) 1170, Brussels 19.9.2007, pp. 45–46.

CESR and ERGEG advice to the European Commission in the context of the Third Energy Package, record-keeping, transparency, exchange of information, CESR/08-998, December 2008, p. 43 a.f.: “The regulatory authority may decide to make available to market participants elements of this information provided that commercially sensitive information on individual market players or individual transactions is not released. This paragraph shall not apply to information about financial instruments, which fall within the scope of Directive 2004/39/EC. […] The three different options for publication presented for consultation were: mandatory` publication by the energy regulator (M3), dissemination by energy regulators based on the assessment of the sufficiency of existing information (M2) and keeping the status quo (M1).”

Directive 2009/72/EC, recitals 33, 34 and 39; Directive 2009/73/EC, recitals 29, 30 and 36; COM (2007) 528 final, pp. 8–9.

Art. 40 Directive 2009/72/EC and Art. 50 Directive 2009/73/EC.

“To exercise the Union's competences, the institutions shall adopt regulations, directives, decisions, recommendations and opinions. A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States. A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods. A decision shall be binding in its entirety. A decision that specifies those to whom it is addressed shall be binding only on them. Recommendations and opinions shall have no binding force.”

Hartley (2006) and Horspool and Humphreys (2006).

CESR and ERGEG advice to the European Commission in the context of the Third Energy Package, record-keeping, transparency, exchange of information, CESR/08-998, December 2008; CESR and ERGEG advice to the European Commission in the context of the Third Energy Package, market abuse, CESR/08-739, October 2008. These advices are given in the context of the Third Energy Package, a set of proposals for new directives amending Directive 2003/54/EC and Directive 2003/55/EC.

CESR is an independent Committee of European Securities Regulators, which was established under the terms of the European Commission Decision of 23 January 2009 (2009/77/EC). One of the tasks of CESR is to improve co-ordination among securities regulators; act as an advisory group to assist the EU commission relating to the field of securities; work to ensure more consistent and timely implementation of community legislation in the Member States. CESR has several working groups consisting of national experts.

ERGEG is the European Regulators’ Group for Electricity and Gas, which was set up by the European Commission by the Decision of 11 November 2003, 2003/769/EC, as its advisory body on internal energy market issues. It is made up of the national energy regulatory authorities of the EU Member States. Its purpose is to facilitate a consistent application of regulations in the field of electricity and gas.”

CESR and ERGEG advice on market abuse, pp. 30–31; CESR and ERGEG advice on record-keeping, pp. 80–81.

CESR en ERGEG advice on record-keeping, par. 151: “It should be noted that platform operators can also be located outside Member States and offer services for delivery of electricity or gas in Member States. This might result in a gap which cannot be sufficiently addressed with this proposal and may need further considerations in case it becomes relevant.” COM (2007) 528 final, pp. 2–4 and 8; Recital 39 Third Electricity Directive 2009/72/EC.

COM (2007) 528 final, Brussels, 19.9.2007, p. 8; CESR and ERGEG advice on market abuse, p. 15.

Compare Art. 1 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ L 96/16, 12.4.2003.

SEC (2007) 1170, p. 26: “In the current framework, transparency is only partially addressed. ERGEG has therefore already proposed guidelines on transparency and advised the Commission that these should be made legally binding. The Commission intends therefore to introduce binding guidelines for transparency either through new legislation or by modifying the existing electricity Regulation (EC) No 1228/2003. It also intends to improve the transparency requirements for gas using Regulation (EC) No 1775/2005. While the current regulatory framework has limited scope as far as transparency is concerned, the business as usual is also considered in this report.”

In general European directives are not binding directly, see Steiner and Woods (2003).

November 2010.

Art. 1(19) 2009/72/EC.

Art. 47(2), 55 and 95 TFEU.

Former Essent Trading International SA.

Jessayan (2009).

Art. 35(2) of Regulation 713/2009/EC of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators, OJ L 211 14.8.2009.

Case 9/56, Meroni & Co Industrie Metallurgiche ApA v High Authority of the European Coal and Steel Community, (1958) ECR 11. Cf. Hancher, L., Hauteclocque, A. de (2010). “Manufacturing the EU Energy Markets: the Current Dynamics of Regulatory Practice”, European University Institute Working Paper, RSCAS 2010/01.

COM (2010) 84 final, p. 12.

Haverbeke et al. (2010).

COM (2007) 528 final, pp. 8–9; CESR and ERGEG advice on record keeping.

Art. 53(1) and (2) MiFID.

Art. 4(17) juncto Annex I part C, MiFID.

Art. 38(2) MiFID Implementing Regulation.

See Art. 4(2) 14 MiFID: “Regulated market’ means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III.”

See Art. 4(2) 15 MiFID: “‘Multilateral trading facility (MTF)’ means a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in a contract in accordance with the provisions of Title II.”

On 24 October 2004, Endex was designated as an exchange by the Minister of Finance of the Netherlands.

See recital 6 and Art. 4(4) MiFID; Proposal for a Directive of the European Parliament and of the Council on Investment Services and Regulated Markets, and amending Council Directives 85/611/EEC, Council Directive 93/6/EEC and European Parliament and Council Directive 2000/12/EC, COM (2002) 625 final, Brussels, 19.11.2002, pp. 15–18.

Catá Backer (2008).

Cf. Art. 37(1) MiFID Implementing Regulation. This rule has direct effect in the national legal order and should therefore not be implemented in national legislation.

Recital 4 MiFID.

See ENDEX Rules (Version 12.0), February 2010. See also for quality requirements for these products e.g. Par. 1–19 ‘Eligible Products’ and Appendix C. See also Art. 40(4) en 43(1) and (2) MiFID; Art. 37 MiFID Implementing Regulation.

Recital 49 MiFID; Art. 36 MiFID.

Art. 5 MiFID.

Art. 2(1) i and k, MiFID.

European Commission, Internal Market and Services DG, Background document for the public hearing on commodity derivatives, Brussels, September 2008, p. 2: “It is important to note that the existing exemptions in the CAD were meant to be non-permanent. They are scheduled to expire in 2010, but the Commission services would prefer to extend them to 2012 in order to buy time for a more thorough review. Clearly, this extension is by no means intended to prejudge the fate of these exemptions after 2012.”

Art. 2(1) b MiFID. See recital 22 MiFID Implementing Regulation; CESR’s Technical Advice on Possible Implementing Measures of the Directive 2004/39/EC on Markets in Financial Instruments, CESR/05-290b, April 2005.

Market Abuse Directive, 2003/6/EC. An adaptation of this law is currently being prepared, see i.a. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committe of the Regions and The European Central Bank. Ensuring efficient, safe and sound derivatives markets: Future policy actions, COM (2009) 563 final, Brussels 20.10.2009, p. 10.

Art. 4(1) 2 MiFID.

COM (2009) 563 final, i.a. p. 2. Further proposals for European financial legislation, adapting the existing, can be expected shortly. A consultation of stakeholders and national governments is completed. Consultation document available at http://ec.europa.eu/internal_market/consultations/2010/derivatives_en.htm

EFET (2007a, b).

EFET (2009).

On 5 December 2008, the Norwegian company Eco Energi announced to have suffered considerable losses resulting from “unauthorized” trading transactions. The total size of the losses was not made public by the company. The CEO resigned and the trader was suspended. The company announced to have made all necessary steps to avoid further damage. Cf. the “packaging industry” of financial instruments by using securitisations by Gazprom in the Netherlands: Meeus (2008). Several companies, i.a. E.ON, were confronted with large losses in the third quarter of 2008 because of energy derivatives: Kakebeeke (2008).

Green Paper on Services of General Interest, COM (2003) 270 final, Brussels, 21.5.2003, pp. 16–19.

Damme et al. (1998) and Devroe (2000).

What defines a ‘reasonable’ price is not elaborated on in this chapter given that further discussion on this issue may require a separate publication.

COM (2009) 563 final.

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank, Regulating Financial Services for Sustainable Growth, COM(2010) 301 final, Brussels, 2.6.2010.

Many objections have been put forward, and not only by large industrial end users and energy companies. See European Commission, Internal Market and Services DG, Summary of the consultation on: Possible initiatives to enhance the resilience of OTC Derivatives Markets, Brussels 16.10.2009, p. 13.

Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, Brussels, COM (2010) 484 final, p. 7.

See Art. 7 (3).

Catá Backer L (2008) Monitor and manage: MiFID and power in the regulation of EU financial markets. Yearb Eur Law 27:349–386CrossRef

CESR and ERGEG advice to the European Commission in the context of the Third Energy Package, market abuse, CESR/08-739, October 2008

CESR and ERGEG advice to the European Commission in the context of the Third Energy Package, record-keeping, transparency, exchange of information, CESR/08-998, December 2008

CESR’s technical advice on possible implementing measures of the Directive 2004/39/EC on markets in financial instruments, CESR/05-290b, April 2005

Damme E, van Jansen J, Potter J, ten Raa T, Verouden V (1998) Universele dienstverlening. Marktwerking ten bate van iedereen. Research report for the Ministry of Economic Affairs, The Hauge, March 1998

Deng SJ, Oren SS (2006) Electricity derivatives and risk management. Energy 31:941–943, 949–952CrossRef

Devroe W (2000) ‘Universele dienstverlening’, als nieuwe manier van denken. Soc Econ Weekbl 3:82–95

EFET (2007a) General agreement concerning the delivery and acceptance of natural gas, version 2.0 (a)/11 May

EFET (2007b) General agreement, concerning the delivery and acceptance of electricity, version 2.1(a)/21 September

EFET (2009) Principles of good conduct for energy trading – the “10 pillars” of good conduct. A single European Energy Market? Traders’ hopes and fears at ten years. Highlights, p 4. http://www.efet.org/Main/Energy_Background_4849.aspx?urlID2r=1

ENDEX Rules (Version 12.0), February 2010

Federal Energy Regulatory Commission (2007) Commission takes preliminary action in two major market manipulation cases. News Release, 26 July, IN07-26-000 and IN06-3-002

Hancher L, de Hauteclocque A (2010) Manufacturing the EU energy markets: the current dynamics of regulatory practice. European University Institute Working Paper, RSCAS 2010/01

Hartley TC, 6 (2006) The foundations of European Community Law, 6th edn. Oxford University Press, Oxford, pp 102–104, 201–206

Haverbeke D, Naesens B, Vandorpe W (2010) Strengthening European regulatory powers. Eur Energy Rev, 25 January 2010

Horspool M, Humphreys M (2006) European Union Law, 4th edn. Oxford University Press, Oxford, pp 77–78

Hull JC (2009) Options, futures, and other derivatives. Pearson Prentice Hall, Upper Saddle River, pp 9–16, 581

Jessayan H (2009) Toezicht op handel van energiebedrijven is een ‘blinde vlek’. Het Financieele Dagblad, 9 January 2009

Kakebeeke P (2008) Risico’s bij energie. Het Financieele Dagblad, 1 December, p 16

Liu M, Wu F (2007) Risk management in a competitive electricity market. Elect Power Energy Syst 29:690–697CrossRef

Marthinsen J (2009) Risk takers, uses and abuses of financial derivatives, 2nd edn. Pearson Prentice Hall, Boston, p 3

Meeus J (2008) Een markt van 8000 miljard. NRC 14 November, pp 13–14

Pilipovic D (2007) Energy risk. Valuing and managing energy derivatives, 2nd edn. McGraw-Hill, New York

Steiner J, Woods L (2003) Textbook on EC Law, 8th edn. Oxford University Press, Oxford, p 56

U.S. Energy Information Administration (2002) Derivatives and risk management in the petroleum, natural gas, and electricity industries. SR/SMG/2002-01

US Senate (2007) Excessive speculation in the natural gas market. Report of the Permanent Subcommittee on Investigations, S. Hrg. pp 110–235. http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=110_senate_hearings&docid=f:36616.pdf

Zielbauer P (2002) Trash agency investigators seize on Enron revelations. New York Times, 8 August, p B5

Title: The Development of the European Electricity Market in a Juridical No Man’s Land
Author: Simone Pront-van Bommel
Publisher: Springer Berlin Heidelberg
Book: Financial Aspects in Energy
Print ISBN: 978-3-642-19708-6

Electronic ISBN: 978-3-642-19709-3

Copyright Year: 2011
DOI: https://doi.org/10.1007/978-3-642-19709-3_10

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Technik"

Springer Professional "Wirtschaft"