I Introduction
Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion managementFootnote 1 (“CACM”) entered into force on 14 August 2015.Footnote 2 This regulation, taken in execution of Article 18(3)(b) and (5) of Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003,Footnote 3 provides a new set of rules on capacity allocation and congestion management through market coupling. Although called “guidelines”, the provided set of rules is contained in a regulation and as such, by virtue of Article 288 TFEU, binding in all its aspects. This implies that the rules cannot be set aside unless they themselves permit this.
Cross-border transmission capacity allocation and congestion management are tasks entrusted to the designated transmission system operators (“TSOs”).Footnote 4 Cross-border transmission capacity is traditionally allocated directly, eg via explicit auctions, whereby (a right to) capacity is traded as a separate good.Footnote 5 Over the years, the implicit allocation of capacity was developed. It implies that cross-border transmission capacity is traded together with the electricity tradeFootnote 6 via market coupling.
Market coupling consists of coupling the order books of different power exchanges (“PXs”) with a view to trading on one PX, via the mechanism of supply and demand, the surplus of electricity offered for trade on other PXs,Footnote 7 thereby optimising the use of interconnector capacity across the entire coupled area.Footnote 8 To the extent that such market coupling implies cross-border trades, cross-border capacity at the interconnectors is traded via the PXs at the same time as the electricity between different European PXs and TSOs.
In this context of market coupling and concerning trades where market players take physical positions (the so-called “spot-market”), CACM sets forth a whole set of mandatory rules that apply to the “single day-ahead coupling” and the “single intraday coupling”.Footnote 9
In this article, we examine CACM’s objectives and assess whether the regulation introduced by CACM is a necessary means to achieve these objectives (II). Subsequently, we assess how CACM affects the activities of PXs in the context of market coupling (III). Finally, we examine, for the selected topics of the adoption (process) of TCM, the mandatory task allocation and cooperation and cost allocation and cost recovery,Footnote 10 whether CACM contributes to a better governance of market coupling (IV). We close our contribution with some concluding observations (V).
CACM is an extensive, complex and technical legal instrument. Given the scope of the present contribution, a detailed and exhaustive description of CACM’s provisions should not be expected.
II CACM: A proportionate measure towards a justified end?
1 CACM: PXs’ regulatory environment disrupted
CACM substantially changes the legal context of market coupling activities performed by PXs.
Prior to CACM, the activities of PXs in the context of spot markets, including those related to market coupling transactions, were not regulated at the European level by a general legal framework,Footnote 11 but left mainly to the mechanisms of competition and voluntary, contractual, cooperation.Footnote 12
The “Third Energy Package” indeed does not contain a general framework governing the activities of PXs or market coupling itself. Regulation (EC) No 714/2009 regulates certain activities of TSOs in the context of cross-border exchanges in electricity, and this set of rules therefore primarily relates to the activities of TSOs in the context of capacity allocation and congestion management with a view to assuring a non-discriminatory access to cross-border capacity and does not, as such, govern the activities of PXs.Footnote 13 In particular, Article 16 of Regulation (EC) No 714/2009 lays down general principles of congestion managementFootnote 14 and Annex I to this regulation sets out guidelines on the management and allocation of available transfer capacity of interconnections between national systems.Footnote 15 It should be noted that the provisions of CACM, contained in an instrument which does not repeal Regulation (EC) No 714/2009, do not replace these general principles and guidelines but further elaborate on them in an attempt to make implicit auctioningFootnote 16 of cross-border capacity on the basis of a flow-based calculationFootnote 17 more unified across the European Economic Area.
The only specific European rules governing, to a certain extent, the activities of PXs on spot markets are the rules on market abuse and insider trading laid down by Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency.Footnote 18 However, certain member states do subject PXs to specific national legislation.Footnote 19
CACM now provides a framework that governs not only the TSOs’ activities in relation to capacity allocation and congestion management, but also (1) governs different aspects of market coupling as such (eg the algorithm to be used, products traded, prices, processes, clearing and settlement of trades and firmness of allocated capacity); (2) subjects PXs to a prior designation scheme; and (3) governs different aspects of the cooperation between PXs and TSOs.
2 CACM’s justifications for the increased regulation of market coupling
An overall justification for the increased regulation of market coupling can be found in recital 3 to CACM. This recital explains that the current rules on capacity allocation, congestion management and trade in electricity should be further harmonised in order to move towards a genuinely integrated electricity market. Therefore, a set of minimum harmonised rules for the ultimately single day-ahead and intraday coupling will enable the provision of a clear legal framework for an efficient and modern capacity allocation and congestion management system that would facilitate Union-wide trade in electricity, allow a more efficient use of the network and increase competition for the benefit of consumers. From this recital, it follows that the main idea is that the harmonised rules will create a clear framework for a modern and efficient capacity allocation and congestion management system, which would, in turn, enhance and facilitate trade in electricity across the EU.
For what concerns PXs specifically, recital 19 to CACM states the following:
“Power exchanges collect bids and offers within different time-frames which serve as a necessary input for capacity calculation in the single day-ahead and intraday coupling process. Hence, the rules for the trading of electricity provided for in this Regulation require an institutional framework for power exchanges. Common requirements for the designation of nominated electricity market operators (…) and for their tasks should facilitate the achievement of the aims of Regulation (EC) No 714/2009 and allow single day-ahead and intraday coupling to take due account of the internal market.”
The specific institutional framework regarding PXs under CACM seems thus to be justified by the purpose of achieving the aims of Regulation (EC) No 714/2009. Regulation (EC) No 714/2009 has two aims:Footnote 20
(1) setting fair rules for cross-border exchanges in electricity; and
(2) facilitating the emergence of a well-functioning and transparent wholesale market with a high level of security of supply in electricity.
The need for regulation, or at least oversight, of the activities of PXs is also justified, in recital 20 to CACM, by the fact that establishing a coupling process requires cooperation between potentially competing PXs in order to establish common coupling functions, increasing the need for oversight and compliance with competition rules for these common functions.
The abovementioned justifications of the European legislator have been translated, in CACM, Article 3, into the objectives of CACM. As regards PXs and their activities, CACM aims in particular at:
(1) promoting effective competition in the trading of electricity;
(2) ensuring fair and non-discriminatory treatment of the so-called designated nominated electricity market operators (“NEMOs”) and market participants;
(3) ensuring and enhancing the transparency and reliability of information;
(4) respecting the need for a fair and orderly market and fair and orderly price formation; and
(5) creating a level playing field for NEMOs.
3 Evaluation: is the increased regulation of PXs really justified?
It follows from the foregoing that the rules of CACM seek to assure a harmonisation of rules regarding market coupling with a view to facilitating the Union-wide trade in electricity. The introduction of a mandatory legal framework to achieve this purpose can have several merits. However, the question is, first of all, whether CACM succeeds at reaping these merits.
A European legislative instrument, and especially a directly applicable regulation, contributes, as a result of its Union-wide application, to assuring harmonised rules and, thus, to the establishment of an internal market for the trade of electricity, without divergences between the national legal frameworks. Additionally, a mandatory legal framework imposes obligations upon the concerned actors, whereas in a purely contractual setting, participating actors are bound depending on their willingness. A mandatory legal framework furthermore has the benefit of a predefined set of rules being available without any discussion being required, which reduces the burden and costs of negotiation between the parties concerned. Finally, a mandatory legal framework can, to a certain extent and in absence of (fruitful) lobbying pressures, assure a fair treatment of all involved parties and a balanced framework that takes into account the interests of all parties.
However, CACM’s benefits are, in respect of the above, limited. First of all, CACM seems not to achieve a true harmonisation due to the possibility it grants, at different occasions, to foresee regional or national deviations.Footnote 21 Moreover, CACM provides specific legal rules for certain elements and obliges TSOs and/or NEMOs to further determine the applicable rules for other elements through terms and conditions or methodologies (“TCM”) they have to adopt and which must meet certain requirements and be approved by the national regulatory authorities (“NRAs”). By opting for this specific approach, CACM’s framework does not really reduce the burden and costs of negotiation. But, by introducing mandatory rules for a “single” day-ahead and intraday coupling and by imposing participation to these couplings, CACM does assure the use of one coupling mechanism for day-ahead respectively intraday trade across the Union by all participating TSOs and PXs – something which a voluntary cooperation can only achieve as long as the common intention to participate exists amongst the parties.
Secondly and more fundamentally, the general principles of subsidiary and proportionality, which govern the use the institutions of the EU can make of their competences,Footnote 22 have to be taken into account. The principle of subsidiarity entails that – in areas which do not fall within their exclusive competence – the institutions of the EU shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the member states themselves and can be better achieved at the level of the EU.Footnote 23 In addition, the principle of proportionality requires that the content and form of any action by an institution of the EU shall not exceed what is necessary to achieve the objectives set forth in the Treaties.Footnote 24
The question thus arises whether the rules introduced by CACM should best be introduced at the level of the EU and whether these rules constitute a measure which is necessary for and does not go further than what is necessary to achieve the objective of attaining a single market for electricity through the introduction of an efficient capacity allocation and capacity management system. Especially for what concerns the latter, we are not convinced that this is the case,Footnote 25 in particular as regards the institutional framework made applicable by CACM to the PXs.
Indeed, according to recital 19 to CACM, this institutional framework is deemed necessary:
(1) because the bids and offers collected by PXs serve as necessary input for the capacity allocation; and
(2) to achieve the aims of Regulation (EC) No 714/2009 (cf supra).
However, market coupling seems to function the other way round, as is confirmed by CACM, recital 4: TSOs provide the necessary input (available capacity) to the order books of PXs and PXs offer the service of taking this input into account when matching offer and demand.Footnote 26 So the first justification does not seem valid. Additionally, it is not clear how the fact that the bids and offers collected by the PXs would serve as necessary input for capacity allocation would justify the introduction of an institutional framework based on a prior licence obligation. As to the aims of Regulation (EC) No 714/2009, these seem to relate to rules of conduct with a view to setting fair rules for cross-border exchanges and to foster a well-functioning and transparent wholesale market. They do not concern prior licence obligations for the business activities of the PXs but concern the way PXs behave when offering their services. Furthermore, to the extent the regulation concerns “cross-border exchanges in electricity”, the issues and obstacles to be solved seem to relate mainly to making available cross-border capacity in the context of cross-border trades, and not to (platforms for) wholesale trading in general.
Arguing that certain activities of PXs have become in fact monopolistic or oligopolistic, claims have been made in the past for rules ensuring a non-discriminatory access to the services provided by PXs and that PXs conduct their activities in a fair and orderly manner.Footnote 27 The European legislator also seems to be convinced that specific regulation is required to ensure a level playing field amongst PXs and a fair and non-discriminatory treatment of PXs and market participants, albeit promoting effective competition.
This does not seem to take into account that introducing complex regulation might have the adverse effect of decreasing competition, nor the fact that different general rules of (European) law already cater to the need for tempering (abuses of) market power (eg prohibition of abuse of a dominant position, essential facilities doctrine, fundamental principle of non-discrimination).Footnote 28 Additionally, the aims of ensuring a level playing field amongst PXs and a fair and non-discriminatory treatment can be achieved by other means than imposing a prior licence scheme.
Taking CACM’s considerations into account, we believe indeed that its provisions should, in respect of PXs, have been limited to the elements that relate to the services they provide in respect of market coupling: non-discriminatory access (for the different PXs but also for market participants, via the PXs), available cross-border capacity, proper implicit allocation of the available cross-border capacity via oversight on the used algorithm and a clear division of tasks and responsibilities between PXs and TSOs, as well as clear rules on cost recovery.
The foregoing should be taken into account, not only when assessing and interpreting CACM, but also when further developing the applicable framework. This will possibly be the case with or through the proposed new Electricity Regulation, which intends to introduce general rules for the operation of electricity markets, for day-ahead and intraday markets and for trade on day-ahead and intraday markets.Footnote 29
III How CACM affects the activities of PXs
1 Introduction of a new market player: the NEMO
One of the novelties of CACM is the introduction of the NEMO, defined as “an entity designated by the competent authority to perform tasks related to single day-ahead or single intraday coupling”.Footnote 30
The tasks related to the single day-ahead or single intraday coupling NEMOs have to perform, are set forth in detail in CACM, Article 7.Footnote 31 Briefly put, NEMOs are entrusted with: (1) the task of acting as market operators in national or regional markets to perform, in cooperation with TSOs, single day-ahead and intraday coupling;Footnote 32 and (2) the market coupling operator (“MCO”) functions, which they have to perform jointly with the other NEMOs.Footnote 33
As a consequence, all NEMOs are obliged to participate in the single day-ahead and intraday coupling and have to perform their tasks themselves or via delegation of tasks under their responsibility.Footnote 34
While the NEMO-definition refers to tasks related to the performance of the single day-ahead or intraday market coupling, the list of NEMO tasks set forth in CACM, Article 7 contains activities which are not necessarily related to market coupling. As a result, it is unclear whether the aim of CACM is to cover only market coupling activities or not. To the extent, for example, receiving orders from market participants and publishing prices is a NEMO task under CACM, any PX not performing market coupling itself (ie not being involved in the performance of the MCO-functions) but relying on another PX for this would nevertheless be considered to perform NEMO tasks. Knowing whether a PX is performing NEMO tasks (or not) is important, since the performance of NEMO tasks is subject to a designation by the competent authorityFootnote 35 in accordance with the designation process and the requirements for designation as set forth in CACM, Articles 4–6.
2 Precondition for offering market coupling services: NEMO designation
Since the introduction of CACM, PXsFootnote 36 can only perform NEMO activities if they are designated as a NEMO. To this end, PXs willing to participate in the single day-ahead and intraday coupling must demonstrate, to the satisfaction of the designating authority, that they fulfil the designation requirements laid down in CACM, Article 6(1).Footnote 37 The designating authorities have to apply the designation requirements in a fair and non-discriminatory mannerFootnote 38 and are, in any case, obliged to designate any applicant that meets the designation requirements.Footnote 39
In the meantime, all member states have designated at least one NEMO.Footnote 40 These NEMOs have been designated for an initial term of four yearsFootnote 41 and must, on a continuous basis, comply with the designation criteria. The designating authorities are responsible for ensuring this compliance.Footnote 42
The designated NEMOs have the right to offer their services with delivery in another member state than that in which they have been designated,Footnote 43 without the need of applying for a designation in that member state (the so-called “European Passport” mechanismFootnote 44 ). The designating authority of the receiving member state will supervise the NEMO offering cross-border services,Footnote 45 it being understood that only the designating authority of the home member state may revoke a NEMO’s designation.Footnote 46
Despite the European passport, the question arises whether the NEMO designation scheme constitutes a justified constriction on the freedom to conduct a business and the freedom of establishment and the freedom of services as ensured to all nationals of EU member states by TFEU, Articles 49–62.Footnote 47 In addition, the question arises whether the European Commission was actually competent to introduce such a far-reaching measure through a low-level piece of legislation, namely a delegated regulation that adopts a network code.
3 NEMO designation: a valid requirement?
CACM was adopted by the European Commission on the basis of Article 18(3)(b) and (5) of Regulation (EC) No 714/2009,Footnote 48 which empowered the European Commission to adopt guidelines providing a minimum degree of harmonisation on rules for the trading of electricity, and to amend the guidelines on the management and allocation of available transmission capacity to ensure “that congestion-management mechanisms evolve in a manner compatible with the objectives of the internal market”.
The scope of this legal basis has to be assessed by taking TFEU, Article 290 into account. According to this provision, a legislative act (eg regulation or directive) may delegate to the European Commission “the power to adopt non-legislative acts of general application to supplement or amend certain non-essential elements of the legislative act”, provided the legislative act explicitly defines the objective, scope, content and duration of the delegation of power.
Consequently, the introduction of the NEMO designation scheme through CACM is grounded on a valid legal basis only if the NEMO designation scheme constitutes: (1) a supplement to or an amendment of a non-essential element of Regulation (EC) No 714/2009 which relates to (2) either harmonising the rules for the trading of electricity or ensuring an evolution of congestion-management mechanisms compatible with the objectives of the internal market.
Even if the introduction of an authorisation scheme could be considered to constitute a non-essential supplement or amendment – quod non – the NEMO designation scheme does not seem justified by the harmonisation of rules for the trading of electricity or ensuring an evolution of congestion-management mechanisms compatible with the objectives of the internal market. While certain member states require(d) market operators to be licensed, national rules for the trading of electricity did not contain a licence requirement for the exercise of the specific market coupling tasks now entrusted to NEMOs. Additionally, while the introduction of the NEMO designation scheme could contribute to ensuring an evolution of congestion-management mechanisms compatible with the objectives of the internal market, it does not seem a necessary and proportionate measure to achieve this aim. Taking into account that CACM’s objectives with regard to PXs activities, which are in the context of market coupling mainly aimed at assuring the proper regulation of market coupling mechanisms – where security of supply is, once the trades are concluded, actually guaranteed mainly via the TSOs – it seems that an evolution of congestion-management mechanisms compatible with the objectives of the internal market (eg universal access to electricity at an affordable price with a security of supply) could just as well have been achieved by foreseeing mandatory rules in respect of the access to the coupling mechanism and of the functioning of the coupling mechanism without any prior licence obligation. Moreover, the scope of application of the introduced designation scheme could have been limited to the activity of market coupling itself (or the licensing of the market coupling algorithm), instead of extending it to the entities operating the market.
IV The governance of the single day-ahead and intraday coupling
Governance relates to the way the interaction and decision-making among the actors involved in single day-ahead and intraday coupling has been organised with a view to achieve the objectives of CACM. In this respect, we will hereafter specifically address: (1) the rules regarding the adoption of TCM; (2) the rules on the cooperation between NEMOs and/or TSOs concerning their allocated tasks; and (3) the rules regarding costs.
1 TCM
In order to perform the tasks ascribed to them, CACM obliges NEMOs to agree upon certain TCM and to submit these TCM, within certain deadlines set, to the relevant NRAs for approval. CACM sets forth the process to be followed and makes a complex distinction in function of the NRAs that need to approve the TCM.
For each type of TCM to be adopted, the rules on decision-making differ, which does not favour the transparency and practical application of CACM.
First of all, NEMOs must submit to all NRAs for approval:Footnote 49
(1) a plan on how to jointly set up and perform the MCO-functions;Footnote 50
(2) a proposal for a joint common set of requirements for efficient matching;Footnote 51
(3) a proposal of development of the algorithms;Footnote 52
(4) a proposal for a back-up methodology, developed in cooperation with TSOs;Footnote 53 and
(5) a joint proposal concerning products that can be taken account in the single day-ahead and intraday coupling.Footnote 54
These TCM are agreed on by consensus or a qualified majority consisting of NEMOs representing: (1) at least 55% of the member states; and (2) member states comprising at least 65% of the population of the EU – unless a blocking minority consisting of NEMOs representing at least four member states exists.Footnote 55 If a TCM is not accepted, it cannot be submitted for approval. CACM then only foresees in an intervention by the European Commission to remedy this deadlock.Footnote 56
Certain TCM are subject to approval only by all NRAs of the concerned region.Footnote 57 The NEMOs of a concerned region have the possibility to agree by consensus among themselves, and with the relevant TSOs,Footnote 58 on TCM for the design and implementation of complementary regional intraday auctions.Footnote 59 The disagreement of one NEMO will result in the TCM not being adopted.
Finally, some TCM only require approval of the NRA (or competent authority).Footnote 60 They can be adopted (individually or not) by the NEMO(s) or TSO(s) of a member state and need only be approved by the NRA (or other competent authority) of the member state concerned.Footnote 61 For NEMOs, this only concerns the proposal for the sharing of regional costs on which NEMOs and TSOs cooperating in a certain region have the option to jointly agree upon.Footnote 62 In the absence of the applicability of a particular decision-making rule of CACM, it seems that consent of all parties involved is required.
If the NEMOs fail to submit a TCM to the NRAs for approval within the respective deadline, they have to provide the competent NRAs and ACER with a draft version of the TCM. ACER will then inform the European Commission, which, in turn, will take the steps necessary to make the adoption of the required TCM possible within four months after being notified of the failure of the NEMOs to do so by ACER.Footnote 63
If the NEMOs do submit a TCM for approval to all or the relevant NRAs, the NRAs have to take a decision, cooperating closely and consulting and coordinating with each other, concerning the submitted TCM within six months,Footnote 64 failing which ACER will adopt a decision within six months.Footnote 65 The relevant NRAs can decide either to approve the TCM or to request an amendment to improve the TCM concerned. If the NRAs request an amendment, the relevant NEMOs have to submit an amended TCM within two months, upon which the relevant NRAs have to decide within two months. If NRAs fail to agree on the amended TCM within these two months, ACER will adopt a decision within six months.Footnote 66
The NEMOs have already submitted, amongst others, the MCO-plan, the approval of which has been withheld for two consecutive times by the NRAs.Footnote 67 This underlines the importance of having a clear approval process with clear deadlines for approval. Indeed, it is currently unclear how many times NRAs can request amendments. An interpretation in light of CACM’s objectives points to a restrictive reading, implying that if the NRAs fail to approve an amended TCM within two months after its submittal, ACER should adopt a decision concerning the amended TCM within six months. Note that the NEMOs could currently avoid the NRAs requesting multiple amendments by not submitting an (amended) TCM, thereby forcing the European Commission to step in.
Besides clear rules on approval, a centralisation of the decision-making power into a single entity (ACER?Footnote 68 ) could contribute to a less complex and more efficient approval process.
Finally, the question arises whether NRAs can be held accountable in case of faulty delaying or withholding their approval. In absence of a specific rule in CACM, this seems to be a matter of applicable national law.
2 Mandatory task allocation and cooperation in the single day-ahead and intraday coupling
The main challenge of CACM is to ensure the good functioning of the day-ahead and intraday coupling. This requires not only the development of reliable systems for the combined matching of orders and capacity, but also a proper organisation of the interactions between the great number of parties involved (ie all EU TSOs and all EU NEMOs). To this end, CACM foresees in a task allocation for NEMOs and TSOs, combined with obligations to cooperate.
As it does for NEMOs (cf supra), CACM obliges all TSOs that fall within the scope of application of CACM to participate in the single day-ahead and intraday couplingFootnote 69 and sets forth the different tasks to be performed, jointly or individually, by these TSOs in the context of the single day-ahead or intraday coupling.Footnote 70 In certain instances, CACM assigns a task to NEMOs or TSOs jointly, which implies cooperation among NEMOs or TSOs. For example, if a TCM should be adopted and agreed upon by more than one NEMO (or more than one TSO), CACM requires that the participating NEMOs or TSOs are to cooperate closely.Footnote 71
As a rule, CACM requires that NEMOs perform the single day-ahead and single intraday coupling in cooperation with the TSOs.Footnote 72 It also obliges TSOs and NEMOs to jointly organise the day-to-day management of the single day-ahead and intraday coupling and to meet regularly to decide on the day-to-day operational issues.Footnote 73
However, CACM does not specifically regulate the manner in which this cooperation between NEMO(s) and/or TSO(s) must take place.Footnote 74 In the absence of any clear indication of the content of these obligations for NEMOs and/or TSOs to cooperate, legal uncertainty as to the rights and obligations of the parties concerned may arise.Footnote 75 For example, when the NEMOs have to develop a TCM in cooperation with the TSOs,Footnote 76 can TSOs impose requirements or conditions for this TCM? In the absence of a clear rule, we believe that NEMOs should, as they are the entities obliged to develop the TCM and submit it for approval, be in control of the development process.
In the same way, it is unclear what happens if (certain) NEMOs or TSOs fail to cooperateFootnote 77 or what the consequences are of the non-approval of a TCM by the NRAs following a failure to cooperate.Footnote 78 Indeed, CACM does not address the consequences of non-compliance with the aforementioned rules.
Non-compliance seems, therefore, to fall outside of CACM’s scope and is to be handled purely on a contractual basis, bearing in mind applicable national legislation. It remains, however, unclear whether CACM, as a mandatory framework, impacts the legality and enforceability of certain contractual provisions on the consequences of non-compliance (such as clauses regarding termination or regarding breaches and liability).Footnote 79
In order to assure the effectiveness of CACM, adequate and effective sanctioning mechanisms should be established, preferably at the European level, such as injunction rights for a central regulatory authority to force non-complying parties to comply and centralised rules to deter non-compliance.
Similarly, while foreseeing in (limited) mechanisms to avoid deadlocks in certain decision-making, CACM does not contain any dispute settlement procedure. This is remarkable since the mandatory cooperation under CACM might, due to the large number of parties that must cooperate, be a breeding ground for potential, complex, multi-party disputes.
3 Cost allocation, cost sharing and cost recovery under CACM
Establishing, implementing and operating the single day-ahead and intraday coupling implies considerable costs related to eg developing the coupling algorithms and elaborating the TCM. The main question is who will have to bear these costs.
CACM contains provisions on costs which aim at ensuring that the costs incurred efficiently to guarantee firmness of capacity and to set up the processes required by CACM are recoveredFootnote 80 and that rules for the sharing of common costs between NEMOs and TSOs are in place prior to the implementation process so that delays due to disputes on cost sharing are avoided.Footnote 81 In respect of the first objective, recital 23 to CACM clearly states that NEMOs, including in performing MCO-functions, should be entitled to recover the costs they incur, if they are efficiently incurred, reasonable and proportionate.
The relevant provisions for NEMOs are the provisions on the general principles of cost recovery,Footnote 82 on the costs of establishing, amending and operating single day-ahead and intraday couplingFootnote 83 and on cost sharing between NEMOs and TSOs in different member states.Footnote 84
Given the importance of these matters, one would have expected a clear and well-structured set of rules that provide clear guidance on how cost allocation, sharing and recovery is to be handled in practice. This is, unfortunately, not the case. In what follows, we set forth our understanding of the different rules that are laid down in the relevant articles of CACM, which distinguish between cost allocation, cost sharing and cost recovery.
a Cost allocation
According to CACM, Article 76(1), all NEMOs bear:
— the common, regional and national costs of establishing, updating or further developing the coupling algorithms and of the single day-ahead and intraday coupling; and
— the common, regional and national costs of operating single day-ahead and intraday coupling.Footnote 85
The terms “common, regional and national costs” are not defined by CACM, Article 76(1). However, CACM, Article 80(2) makes this same distinction for the costs of “establishing, amending or operating the single day-ahead and intraday-coupling” and provides a definition for each of these categories – which all encompass both costs relating to NEMOs’ tasks as costs relating to TSOs’ tasks. If the same definitions are to be used for CACM, Article 76(1), this would imply that as soon as common, regional or national costs relate to establishing, updating or further developing the coupling algorithms or operating the coupling mechanisms, they are to be borne by the NEMOs – regardless of whether they relate to NEMOs’ tasks or TSOs’ tasks.
Subject to an agreement with the relevant NEMOs and approval by the relevant NRAs, TSOs may make a contribution to these costsFootnote 86 but they are not obliged to. If TSOs do not agree to contribute, the interpretation above implies that NEMOs would, in principle, bear the costs related to TSOs’ actions and tasks in connection with the coupling algorithms or the operation of the coupling mechanisms.
It would have been more logical to foresee that the costs incurred by performing the roles attributed to NEMOs respectively TSOs by CACM, are allocated to NEMOs respectively TSOs.
b Cost sharing
CACM, Article 80 provides rules on the sharing of costs that apply to costs incurred from the entry into force of CACM.Footnote 87 CACM, Article 80(2) distinguishes between:
— the common costs, which result from “coordinated activities” of all NEMOs or TSOs participating in the single day-ahead and intraday coupling;
— the regional costs, which result from activities of NEMOs or TSOs “cooperating” in a certain region; and
— the national costs, which result from activities of the NEMOs or TSOs in that member state.
All three categories relate to the costs of establishing, amending or operating the single day-ahead and intraday-coupling. However, no further explanation is given as to what constitute “coordinated activities” or “cooperating in a certain region”, creating uncertainty as to what costs are in fact falling under these categories. Additionally, it is unclear whether the different categories refer only to, on the one hand, costs of NEMOs and, on the other hand, costs of TSOs as well as costs of NEMOs and TSOs or whether only NEMOs and TSOs costs should also be taken into account.
Common costs must be shared among the TSOs and NEMOs in the member states and third countries participating in the single day-ahead and intraday coupling as follows:
—1/8th of the common cost must be divided equally between each member state and third country;
—5/8ths must be divided between each member state and third country proportionally to their consumption; and
—2/8ths must be divided equally between the participating NEMOs.Footnote 88
This sharing key applies to all the common costs related to establishing, amending or operating the single day-ahead and intraday-coupling, the origin of the common costs (TSOs or NEMOs cost) not seeming to be relevant. Under the “2/8ths rule”, NEMOs will thus have to bear and divide equally amongst themFootnote 89 a share of the costs related to TSOs’ activities.
Notably, and in spite of its title, CACM, Article 80 provides a key for the sharing of common costs amongst member states and third countries, but offers no further information on how the common costs allocated to a member state should subsequently be shared amongst the TSOs and NEMOs of that member state. Especially for what concerns the 5/8ths share distributed among the member states proportionally to their consumption, the question arises whether this share is to be divided equally among the NEMOs or TSOs active in a member state, or in proportion to their market share. According to CACM, Article 75(2), the member states’ share of the common costs referred to in CACM, Article 80(2)(a), the regional costs referred to in CACM, Article 80(2)(b) and the national costs referred to in CACM, Article 80(2)(c) assessed as reasonable, efficient and proportionate can be recovered through NEMO fees, network tariffs or other appropriate mechanisms as determined by the competent NRA(s). Thus, it seems that each NRA of the concerned member state(s) will determine the manner of the division of these costs between the NEMOs and the TSOs and the recovery of these costs within the given member state and for each of the costs categories. This implies that the division and recovery of these costs might differ from member state to member state.
In respect of the sharing of regional costs, CACM offers NEMOs and TSOs cooperating in a certain region the option to either adopt a joint proposal for the sharing of regional costs or apply the cost-allocation key for common costs.Footnote 90 Should the NEMOs and TSOs opt for the application of the cost-allocation key, the abovementioned observations apply.
As no specific provision is provided for the sharing of national costs, the sharing of these costs will be determined nationally. No further guidance is provided on how this sharing should take place.
c Cost recovery
Subject to certain conditions, CACM allows NEMOs and TSOs to recover the costs they have incurred. Ambiguity reigns, however, for what concerns the recovery of NEMO costs under CACM.
On the one hand, CACM, Article 76(3) states that NEMOs can recover the common, regional and national costs of establishing, updating or further developing the coupling algorithms, of the single day-ahead and intraday coupling and of operating single day-ahead and intraday coupling – for which TSOs did not decide to contribute – by means of fees or other appropriate mechanisms, provided these costs are reasonable and proportionate.Footnote 91 On the other hand, CACM, Article 75(2) indicates that only the member states’ share of the common costs and regional costs referred to in CACM, Article 80 assessed as reasonable, efficient and proportionate can be recovered through NEMO fees, network tariffs or other appropriate mechanisms.Footnote 92
How these two provisions relate to one another is a mystery, since the costs referred to in CACM, Article 76(1) and (3) seem to be the same as those referred to in CACM, Article 80. Should the general principle contained in CACM, Article 75(2) prevail over CACM, Article 76(3)? If so, this would imply that NEMOs would not be able to recover the 2/8ths share of (all) the common costs and, if applicable, the regional costs they have to share among themselves. Only national costs and regional costs to which the cost-sharing key does not apply, would then be fully recoverable under CACM, Article 76(3). This would not be in line with the objective to ensure that all efficient, necessary and proportionate NEMO costs can be recovered (see CACM, recital 23).
In any case, it will be up to the NRA of each member state concerned to determine the extent in which TSOs can decide to contribute to the common NEMOs costs listed in CACM, Article 76(1) and/or the extent in which NEMOs are allowed to recover such costs to which TSOs did not contribute.
Finally, CACM does not contain any criteria for determining whether a cost is efficient, necessary and proportionate and thus recoverable. This further increases the probability of discussions on cost-recovery being held with the respective NRA(s).Footnote 93
d Observation
CACM’s rules on cost allocation, cost sharing and cost recovery are complex and far from clear, making it difficult to apply these rules in practice. This begs one to wonder why the European legislator did not adopt a different approach altogether, under which the different types of costs (common, regional and national costs on the one hand and NEMOs, TSOs and NEMOS and TSOs costs on the other hand) are clearly defined or identified and subjected to clear cost allocation and recovery rules that are in line with CACM’s objective. An approach could, for example, have been to first allocate common costs to NEMOs and TSOs respectively, to subsequently allocate them (in their respective category) to the participating (member) states and only then share them among the NEMOs respectively TSOs operating within the given member state in accordance with clear and unambiguous criteria that apply throughout the single electricity market.
In addition, as illustrated above, CACM’s rules on cost allocation, cost sharing and cost recovery are primarily focused on allocating and sharing costs between the (member) states that participate in the single day-ahead and/or intraday coupling. As a consequence, the allocation of costs to NEMOs respectively TSOs, the sharing of costs among NEMOs and/or TSOs within a given (member) state and the recovery of costs within a given (member) state are scarcely regulated by CACM and, hence, shall be dependent upon NRA(s) decisions and/or contractual arrangements between NEMOs and TSOs.
The power granted to each NRA to determine the manner of sharing of, inter alia, common costs among NEMOs and/or TSOs within a member state creates the possibility of mutually diverging sharing mechanisms across the different member states that partake in the single electricity market, which potentially undermines the desired level playing field for all participating NEMOs.
V Concluding observations
Based on our examination of CACM’s objectives, we conclude that CACM seems, for certain aspects, to go beyond what is strictly necessary for and proportionate to achieving its goals, without giving a satisfactory justification for this. This is especially so for the NEMO designation scheme.
In respect of the aspects of governance examined, we believe that CACM constitutes a step forward by setting forth a division of tasks and determining the roles and responsibilities of the parties involved. Its provisions nevertheless give rise to interpretation issues related to, amongst others, the process for adopting and approving the TCM, the obligation for NEMOs and TSOs to cooperate and the allocation, sharing and recovery of costs.
CACM, therefore, does not provide a complete legal framework, and creates, on many occasions, legal uncertainty.
To the extent that CACM, on the one hand, regulates aspects that are questionable but, on the other hand, does not provide a complete legal framework and thus leaves room for interpretation, one might wonder whether CACM is a better framework compared to what existed before. It seems to us that it would have been more efficient to foresee, rather than a prior NEMO designation scheme and a general set of obligations, an increased harmonised regulatory oversight, possibly via a central entity, and a posteriori monitoring of PXs’ market coupling activities to the extent required to assure a robust and efficient implicit allocation of capacity. While the European legislator does take a step in this direction by intending to grant ACER certain competences, such as approving TCM and monitoring NEMOs in order to ensure that they carry out their functions under CACM,Footnote 94 further adjustments should be made to the applicable legal framework in order to ensure that CACM will turn out to be a satisfactory legal framework.
