Legal Eye: EU Energy Law

Poland faces a July 1 deadline to fully implement EU energy law as provided by two Directives, one covering the distribution and sale of electricity (Directive 2003/54/EC) and the other covering the distribution and sale of natural gas (Directive 2003/55/EC). Both Directives became binding on Poland upon accession to the EU on 1 May 2004. Broadly speaking, each Directive requires Poland and all Member States to gradually liberalize their respective markets with respect to the generation, transmission, storage and distribution of natural gas and electricity.

Unbundling

In addition to ensuring the choice of supplier by July 1 2007, each Member State must also ensure the unbundling of integrated energy companies, meaning that the transmission and distribution of electricity and natural gas to the end-user must be conducted by independent entities up and down the supply chain. In particular, energy distributors need to be separate from the supplier in order to guard against any cross subsidies and distortion to a competitive market. The purpose of unbundling is to "level the playing field" for independent distributors to enter the market. Despite the fact that the natural gas sector will almost certainly not achieve complete unbundling by the July 1 2007 deadline, Poland receives relatively high marks here in comparison to other EU Member States.

Long-term power agreements

The Sejm recently adopted legislation that will terminate long-term power supply contracts in an effort to comply with the July 1 deadline. The need for legislation is clear, as up until this year only about 30 percent of eligible industrial end-users have in fact been able to switch their energy supplier, in large part due to the intransigence of the power suppliers to renegotiate agreements, some of which were for terms as far in the future as 2027. The continued existence of long-term power supply agreements posed a dilemma for Poland vis-á-vis the requirement to open up its energy sector to greater competition. The regulation of end user prices for both natural gas and electricity served as a deterrent to increased competition, inhibiting new investment and contrary to the goal of unbundling the supply of energy.

Integrating EU energy networks

At present it is estimated that only about 20 percent of all electricity in the EU is supplied by a "foreign" entity, meaning from a supplier located in one Member State to an end-user in another Member State. The number is even less for Poland. As of July 1 2007 all barriers currently constraining the supply of energy from one Member State to another are supposed to disappear. According to the most recent Report on the Functioning of Internal Market in Electricity and Gas, "cross-border competition is not yet sufficiently developed to provide customers with a real alternative" from local suppliers. This applies not just to Poland but rather to all Member States. Achieving open competition by July 1 2007 does not seem likely due to the state of the physical structure of the transmission networks in Poland. Even if the necessary changes have been introduced to Poland's energy regulations by this date, the physical condition of the existing natural gas and electricity transmission networks will prevent full integration from being realized soon.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners. fogo@pl.millercanfield.com