Guest post: Conflict between EU competition law in the energy sector and WTO law: Russia’s challenge against “unbundling”

Zachęceni sukcesem naszego pierwszego anglojęzycznego posta zdecydowaliśmy się kontynuować tę praktykę. Dzisiaj więc kolejny guest post przygotowany przez zagranicznego autora. Tym razem temat techniczny (ale i bardzo ważny) dotyczący zgodności "Trzeciego Pakietu Energetycznego" Unii Europejskiej z wymogami prawa Światowej Organizacji Handlu (w szczególności obowiązku oddzielania sprzedaży gazu od przesyłu, czyli tzw. unbundling).

Autorem posta jest Tilman Dralle, doktorant z Uniwersytetu w Dreźnie, obecnie visiting scholar w Lauterpacht Centre for International Law (Uniwersytet w Cambridge).

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While central and eastern EU Member States seek to frustrate Gazprom’s newest plans to expand the Nord Stream gas pipeline by arguing that the project is not in conformity with the “ownership unbundling” requirement provided by the EU’s Third Energy Package (TEP), Russia’s challenge against this central pillar of the EU energy legislation is underway. On 20 July 2015, the WTO Dispute Settlement Body established a panel, which will review several claims of the Russian Federation relating to the TEP and in particular to the unbundling regime contained therein. According to information published by the European Commission in January 2016, the composition of the panel is ongoing. Given that Russia’s claims go to the heart of the EU competition regulation in the energy sector, the European Union and its Member States – Certain Measures Relating to the Energy Sector case (DS476) has the potential to significantly alter the landscape of EU energy law and policy.

So what is “unbundling” about? Unbundling measures require the separation of production/generation and supply activities from transmission operations. The rationale for such an approach is twofold: First, it is believed that the “transportation” of energy through gas pipelines and electricity transmission lines constitutes a natural monopoly. In other words, energy transmission cannot be carried out on a competitive basis. Second, vertically integrated companies which control transmission networks and are active in the production/generation or supply of energy not only have the ability but also strong incentives to discriminate against competitors as regards network access. In order to guarantee non-discriminatory network access, the EU adopted the Third Energy Package in 2009. The TEP (directives 2009/72/EC and 2009/73/EC) introduced strengthened unbundling requirements for the gas and electricity markets. Subject to certain conditions, the EU Member States could choose between three main unbundling models: 

• Ownership Unbundling (OU);
• Independent System Operator (ISO);
• Independent Transmission Operator (ITO).

While, under ownership unbundling, producers and suppliers cannot have “control” or any “right” over transmission systems, the ITO model allows some degree of vertical integration but at the same time comes with heavy regulation in order to ensure that vertically integrated undertakings cannot interfere with network operations.

Among the third-country companies, the Russian company Gazprom has been most visibly affected by the reinforced unbundling requirements in the TEP. One of the most tangible consequence was that Gazprom was forced to sell its shares in the national transmission system operators of Lithuania (Lietuvos Dujos) in 2014 and Estonia (Eesti Gaas) in 2015, after both countries had opted for ownership unbundling in the gas sector. Furthermore, in late 2014, Gazprom decided to cancel the South Stream gas pipeline project, mainly because the European Commission called into question the compatibility with EU law of several bilateral intergovernmental agreements, concluded between Russia and EU Member States, relating to the construction and operation of South Stream. In the view of the Commission, the intergovernmental agreements violate inter alia the unbundling requirements of the 2009/73/EC directive. Finally, there is an ongoing controversy as to whether the EU’s unbundling requirements apply to Nord Stream 2, the latest Gazprom-sponsored project. Against this background, it should not be surprising that Russia decided to initiate WTO dispute settlement proceedings against the EU. As mentioned above, the WTO Dispute Settlement Body formally established the panel on 20 July 2015. The claims raised by Russia relate to both the General Agreement on Trade in Services (GATS) and the General Agreement on Tariffs and Trade (GATT).

As regards the unbundling requirements in the TEP, Russia challenges: 

(i) the unbundling requirements as such, arguing that the prohibition for gas producers and suppliers to supply gas transmission services amounts to an impermissible market access restriction under Art. XVI GATS;

(ii) the special ownership unbundling requirements for public transmission system operators as being inconsistent with the national treatment (NT) obligation in Art. XVII GATS;

(iii) the variety of unbundling models among the EU Member States, on the basis that this variety amounts to a violation of the most-favored-nation (MFN) obligation under Art. II:1 GATS and I:1 GATT and of the national treatment obligation under Art. III:4 GATT;

(iv) the exemption of “upstream pipeline networks” from the scope of the unbundling requirements, arguing that this exemption is inconsistent with the GATT principles on MFN and NT.

It is quite likely that many of the claims made by the Russian Federation will eventually be rejected by the WTO panel.

First, while Croatia, Hungary and Lithuania have undertaken market access (and national treatment) commitments on pipeline transport services, ownership unbundling policies do not restrict market access within the meaning of Art. XVI GATS. In US – Gambling, the Panel held, and the Appellate Body confirmed, that a general ban on the supply of a service in a (sub-)sector in effect amounts to a “zero quota” and thus infringes Art. XVI lit (a) GATS, which inter alia prohibits “limitations on the number of service suppliers in the form of numerical quotas”. Even on the basis of this far-reaching and controversial interpretation, ownership unbundling requirements do not constitute an impermissible market access restriction, because they prohibit the supply of transmission services not in a general manner but only for specific service providers depending on supplier-related characteristics. The same finding applies, a maiore ad minus, to ISO and ITO.

Second, the special ownership unbundling requirements for public transmission system operators should not be interpreted as being inconsistent with the GATS NT obligation. The TEP clarifies that in the case of State-owned entities, the ownership unbundling requirements are complied with if “two separate public bodies” exercise control over a transmission system operator on the one hand and over a producer or supplier on the other. In other words, EU Member States are not under an obligation to divest their transmission assets. Finding a violation of the NT obligation in this context would effectively force WTO Members to privatize their transmission assets. This would clearly disturb the delicate balance between national regulatory autonomy and trade liberalization inherent in the WTO agreements.

Third, the variety of unbundling models among the EU Member States does not give rise to any violation. It is recalled that, subject to certain conditions, the EU Member States were free to choose between the three main unbundling models OU, ISO and ITO. Although the EU bears responsibility for the Member States’ actions, the resulting heterogeneity is WTO-consistent, mainly because it is highly doubtful that the EU’s MFN and NT obligations under GATS/GATT can be used to enforce regulatory uniformity among all Member States.

It seems that the main problematic issue is the exemption of “upstream pipeline networks” from the scope of unbundling requirements. Under the TEP, an upstream pipeline network is defined as “any pipeline or network of pipelines operated and/or constructed as part of an oil or gas production project, or used to convey natural gas from one or more such projects to a processing plant or terminal or final coastal landing terminal”. Although it is not entirely clear how the upstream pipeline exemption is applied in practice, it appears that several offshore pipelines coming from northern African countries, like Transmed or Greenstream, are classified as such by the European Commission. This conclusion is based on the fact that the transmission system operators of the above-mentioned pipelines have not been certified as compliant with any of the unbundling models in the gas directive. Taking into account that upstream pipelines are also exempted from the general third party access obligation, gas imported through such pipelines appears to have a competitive advantage over gas imported through normal transmission pipelines. If the Russian Federation is able to show that most of its gas exports to the EU are accorded the less favorable regulatory treatment, while most like products exported from other third countries receive the more favorable treatment, Art. I:1 GATT could be violated.

In conclusion, the case European Union and its Member States – Certain Measures Relating to the Energy Sector provides a rich source of examples of how unbundling measures (negatively) affect cross-border trade in goods and services. Despite the fact that only few of the Russian claims are promising, the dispute highlights that there is a certain tension between the (competition) regulation of the EU internal energy market and the multilateral trade liberalization within the framework of the WTO. It remains to be seen how the panel will resolve the legal questions at issue. In any case, it is already clear that the case will be one of the most important energy WTO disputes for the foreseeable future.

Tilman M. Dralle is a Ph.D. candidate at the University of Dresden and currently a visiting scholar at the Lauterpacht Centre for International Law at the University of Cambridge.