Legal Eye: Liberalization by law

"Member States need to quickly and fully implement the gas and electricity Directives, not only in letter but also in spirit"
- EU Energy Commissioner Andris Piebalgs

EU energy law is generally based on 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 May 1, 2004 and were to be fully transposed into national law by the summer of 2004. Broadly speaking, each Directive requires member states to gradually liberalize their respective markets with respect to the generation, transmission, storage and distribution of natural gas and electricity. Poland, along with each member state, has until July 1, 2007 to fully comply with each Directive. Specifically, by this deadline end-users (that means you and me) should be "free to shop around for gas and electricity supplies ... your current supply companies will no longer be your only choice."

Unbundling
In addition to ensuring 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, at least in legal form, from other components 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. The natural-gas sector at present is behind the electricity sector in achieving the July 1, 2007 deadline.

Long term power agreements
The continued existence of long-term power-supply agreements poses a dilemma for Poland vis-á-vis the requirement to open up its energy sector to greater competition. The ongoing regulation of end-user prices for both natural gas and electricity acts as a deterrent to increased competition, inhibiting new investment and contrary to the goal of unbundling the supply of energy. Fewer than 25 percent of eligible industrial end users have switched energy supplier following Poland's accession to the EU, in large part due to the continued existence of long-term power-supply agreements.

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. 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 the 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 depends as much on Poland upgrading the physical condition of its energy-transmission network as eliminating any remaining legal obstacles that may exist. Most likely, 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 to be realized anytime soon.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners