Academic journal article Energy Law Journal

Regulation and Liberalization of the European Electricity Market - a German View

Academic journal article Energy Law Journal

Regulation and Liberalization of the European Electricity Market - a German View

Article excerpt

As of late, "liberalization" and "regulation" of electricity markets have devolved into expressions of largely inflated use, perhaps the safest and fastest way for those terms to become meaningless. But, properly understood, these terms remain meaningful, reflecting a fundamental change in the legal framework designed for energy markets; a change which started in the U.S. and which now, after some delay, is occurring in Europe as well. Liberalization, for purposes here, refers to the abolition of the rights of monopolies, rights which accorded European and U.S.-American energy suppliers protection against competition. Regulation, as used here, has a double meaning. First, it relates to measures taken or enacted to ensure competition in liberalized (energy) markets. In this respect, regulation constitutes a type of sector-specific competition law, adjusted to meet the economic and technical characteristics of the various energy markets. Second, regulation makes it possible to take account of the fundamental importance of secure and reliable energy supply for the public welfare. Under this view of regulation, the vagaries of energy supply are not left to the forces of supply and demand. Instead, the imposed regulation specifies specific standards-for example, with regard to so-called services of general interest and to security of supply. In so doing, these regulations limit private market development. Thus, regulation is both a result of, and a necessary accompaniment to market liberalization. It is important to bear in mind that, while some form of regulation may be needed to accompany market liberalizing measures, the particular form of regulatory administration to be installed is, at least for the moment, an open question. It may be possible to achieve the sought for regulatory objectives through several means.1

There is an intense academic debate concerning the extent to which administrative regulation can curb or eliminate the new economic freedoms granted private market participants as a result of market liberalization. Increasingly, market experts are warning that the merely transient and temporary regimes for establishing and ensuring undistorted competition put into place in response to newly liberalized energy markets may turn into a permanent system of governmental regulation. These concerns suggest the following fundamental questions: does the bureaucratic burden of regulation sufficiently support liberties resulting from liberalization? Does it support the positively intended use of freedoms in these markets without interfering with its substance? Or does such regulation unjustly encroach on economic liberties, such that the underlying premise behind market liberalization must be called into question?

Liberalization constitutes a ground-breaking change to the whole energy sector. Consequently, this process of liberalization presents special challenges and risks, some of which may lead to serious mistakes if not handled appropriately. A perfect illustration of these risks is the electricity crisis which hit California in 2000 and 2001,2 a crisis which-as we know by now-was caused in large part by an inadequate design of the legal framework for the liberalized Californian energy market.3

Although I have looked at the American regulatory structure for analogies, I do not profess to be fully conversant in American energy law. Rather, this article focuses on the problems and challenges associated with liberalization and regulation of Europe's energy markets. My remarks will fall into several broad sections.

In the first part of this article, I will explain why the European process of liberalization and regulation commenced relatively late as compared to the development in the U.S., why it was conducted in such a hesitant way, and why it has proved incapable of paving the way for a truly open internal European market for electricity, one devoid of obstacles to free trade. Put in a nutshell, the roots of these problems can be found in the respective-and divergent-economic histories of the energy markets of the different member states of the European Union (EU). …

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