France Takes First Steps To Open Electricity Market | Norton Rose Fulbright - March 2000

By Robin Mizrahi and Lynne Gedanken

France took modest steps last month to open its electricity market to competition.

Although the extent of liberalization looks limited at first glance, it should not be underestimated in a country with a long tradition of governmental provision of public services.

The Assemblée Nationale voted in early February for competition after months of friction with the European Commission over when France would take the first step towards implementing EU Directive 96/92/EC, which provides for phased competition in the European electricity sector. (See “Off to the Races in Europe” in the March 1999 issue of the NewsWire for earlier coverage on the European directive.)

Key Provisions

The main provisions of the new French law (No. 2000-108) are as follows.

• The energy minister is required to set a multiyear program of generation investment that allocates capacity by primary energy source, production technique (for example, cogeneration) and region (article 6).
• A procedure is set for the energy minister to grant authorizations to operate the production facilities included in the generation investment program (article 7). The energy minister is also given the right to issue tenders for new capacity if the objectives of the generation program are not reached (article 8). Electrictié de France, or EdF, may participate in these tenders. It must enter into a power purchase agreement with the winning bidder, in accordance with the tender provisions, if it does not win the bid.
• The law establishes a right for any eligible customer — currently consumers of more than 20 GWh per year, dropping to consumers of more than 9 GWh per year by 2003 — to enter into a power purchase contract with any producer situated in an EU country. Eligible customers also include power producers who may purchase an as yet unspecified percentage of their electricity production for resale (article 22). Power in Europe, a Financial Times publication, reports that 800 customers (excluding producers) will become eligible this year and that the number will increase to 2,500 by 2003.
• The law establishes a right of access to transmission and distribution networks to allow performance of contracts between eligible customers and producers and the supply of power by a producer to its affiliates. Access is to be provided at a nondiscriminatory tariff based on the networks’ costs (including expansion costs) and set by the ministers in charge of energy and the economy (articles 4 and 23).
• The transmission and distribution network managers are required to expand their respective networks in order to enable connection of producers and consumers (articles 14 and 18).
• The law sets up a procedure for granting authorizations to build lines in addition to those of the existing transmission and distribution networks (article 24).
• Finally, EdF is required to provide emergency power for unforeseen outages to producers and eligible customers at a tariff set by the ministers in charge of energy and the economy, which tariff cannot be lower than cost (articles 2 and 4).

It is not yet certain whether the European Commission will be satisfied that the new law complies with the EU directive. There are several points of potential controversy. The 3-year minimum term imposed on power purchase agreements between eligible customers and producers may be viewed as anticompetitive and unnecessarily intrusive. The European Commission may also be concerned that the criteria listed in the directive for granting operating authorizations without a tender do not include the need for capacity, while the law imposes that criterion. The provisions relating to employment matters in the electricity and gas industries are another area with which the European Commission may take issue.

Network Access?

The law designates EdF as manager of the transmission network. EdF is also the main manager of distribution networks and by far the largest producer of power.

This leads to the central question of whether the law, with EdF as a substantial producer and transmission network manager, provides an adequate structure to ensure actual nondiscriminatory access to, and sufficient expansion of, the transmission and distribution networks. This is a particular concern because as manager of the transmission network, EdF will be making the projections that serve as the basis for the government’s generation program and will advise the energy minister on whether to issue tenders for new capacity. In addition, other transmission users will need to enter into contracts for transmission service with EdF. Therefore, EdF, in its capacity as transmission network manager, will have a direct involvement in decisions related to the type of capacity to be built and whether to issue tenders for capacity in which it may participate as a producer, as well as the ability to affect other transmission users through the contracting process.

The law has rules designed to ensure that the EdF department responsible for managing the transmission network functions in strict independence from the rest of the company. Moreover, it has an obligation to act in a nondiscriminatory manner and in accordance with a concession approved by the Conseil d’Etat. As distribution networks manager, EdF also has obligations to act without discrimination, but the rules designed to ensure the independence of “EdF distribution networks manager” from “EdF producer” are less clear than in the case of its transmission network manager capacity. A risk lies in the fact that access to both the transmission and the distribution networks will be governed by contracts between the EdF as network manager and its users. Although the Conseil d’Etat has the authority to lay down procedures for transmission contracts, entering into these contracts may involve difficult negotiations with EdF.

In the end, the law’s success in achieving nondiscriminatory access will depend on the Commission de régulation de l’eléctricité, or CRE, an independent body created by the new law. It will have broad powers to issue rules on access, use, operation and development of the networks, to settle disputes between managers and users of the networks, and to punish breaches of their obligations with respect to the networks. Possible sanctions include up to a one-year ban from access to the networks and fines in amounts of up to 3% — or 5% in case of a second breach of the same obligation — of turnover. The law requires the CRE to settle disputes within six months. Decisions by the CRE on dispute resolution may be appealed through a potentially lengthy judicial review process. On the other hand, the alternative remedy provided under the law for the producer to receive an authorization to build its own lines may not be a practical alternative in view of the conditions that would have to be satisfied. The CRE can also refer cases of anticompetitive behavior to the French antitrust authorities.

Although the law may not always be clear and straightforward, the fact that it passed at all may still be seen as an achievement in view of the French historical and social context. As is so often the case, what effect the law eventually has will depend on the political will of the government, the strength of the local regulating institutions and antitrust authorities (with the added weight of the European Commission) and the willingness of EdF to perform as a true independent system operator. In this latter regard, EdF may well draw on its substantial experience outside France to provide open nondiscriminatory transmission access. The hope of those who support the opening of the market to competition is that the law will create enough momentum to continue further.

by Robin Mizrahi and Lynne Gedanken, in London