Analytics, Baltic States – CIS, Direct Speech, Energy, EU – Baltic States, Gas, Latvia, Legislation

The countries have also mutually agreed on the procedure to be followed in the territories that are not within the borders of any country. When countries are forming unions, they agree whether and to what extent the legislature and performance control competences inherent to the member states are transferred into the competence of the union. However, the limits of a delegated competence like this shall also not exceed the borders of the countries forming the particular union, because this is the grounds for sovereignty of the countries. When one country is implementing its authority to apply the laws adopted by it in its territory only, the exclusive rights of another country to implement legislature and performance control rights in its territory are being respected. In turn, it arises therefrom that actions not implemented in the territory of a particular country/union is not subject to laws and regulations applicable in such country. This seems so self-evident nowadays that any exceptions are worth noticing.

One of such exceptions is competition law. In both Latvia and all EU Member States, because this exception arises from the Treaty on the Functioning of the European Union; this exception provides that the competence of a EU Member State includes punishing the company for violations of the competition law committed, inter alia, in another Member State or even in a third country if the purpose or consequences of the violation may hinder competition in the punishing Member State. Consequently, not the country where the violation has been committed, rather than the county actually or potentially affected by the violation is competent to assess the legality of action and to impose punishment. Accordingly, the European Commission as well is entitled to establish a violation and to impose punishment on companies that have implemented activities directed against competition, inter alia, outside the territory of the EU.

The Directorate-General for Energy of the European Commission has proposed the initiative to amend the currently applicable Gas Directive[1]. Although the initiative has earned criticism within the Commission itself, it has not been fully rejected still. It is substantial in the context of this article because it demonstrates the effort to establish cross-border jurisdiction.

Gas is an important resource for the EU. In providing for availability of this resource, an important role is played not only by those who own this resource, but also those who own the infrastructure so that gas can be supplied. Historically, considering both the competition situation on the market and the technological solutions, and the social and political set, etc., often the owner of infrastructure required for using this resource was simultaneously the seller of the resource as well. This ensured both stability and dependency on the particular gas supplier because situation like this created large market power for the seller of gas, who was simultaneously the owner of the infrastructure as well. Such advantages in market power considerably reduce development of competition. First, due to the large costs of construction of alternative infrastructure. Second, due to deployment and need for alternative infrastructure. Would it be logical from the resource economy perspective for each supplier to build its own infrastructure? To change the supplier, a consumer as well would have to consider construction of additional gas pipe to its plant or household. Would that motivate a gas consumer to choose another supplier? Most likely, not.

Gas Directive is addressing these issues, including for the purpose of facilitating competition between gas suppliers without construction of the required additional supply infrastructure. Pursuant to the Gas Directive, companies that own the infrastructure required for supply, the transmission system[2], must provide access to it to other suppliers. Gas Directive also sets forth what the interconnector is –a transmission line which crosses or spans a border between Member States for the sole purpose of connecting the national transmission systems of those Member States, thus forming the joint EU transmission system where unified terms and conditions operate, including that they provide equal competition conditions for all market players when supplying gas throughout the territory of the EU. At the same time, this line separates also the EU jurisdiction in regulating gas market infrastructure, i.e. the infrastructure that the Gas Directive is applicable to includes the unified infrastructure of Member States within the borders of the EU Member States. So far, the regulation complies with the generally accepted aspect of jurisdiction discussed above.

However, the above initiative of the Directorate-General for Energy envisages shifting this line of jurisdiction. According to the proposed amendments, the Gas Directive will apply also to infrastructure connecting the infrastructures of Member States and third countries. While the proposed amendments do not affect the infrastructure located on land, with respect to underwater infrastructure the rules of the game are changed substantially. In the event of land infrastructure, the interconnector and the entire infrastructure is in the territory of the EU. In the event of underwater infrastructure, not only the interconnector, but also a portion of the infrastructure are not in the territory of the EU; it may be located in the territory of another country as well as in international waters where different legal regulation applies.

Thus, by means of the amendments, the EU regulation would be applied to activity that is not implemented in the territory of the EU. As long as control over the above legal regulation will take place and consequences for the failure to comply with it will be faced by the companies in the EU, there would be no problems from the regulation viability perspective. Similar to the competition law. However, in any event, even if such legal regulation could be introduced, there is an outstanding question of whether it would be lawful. It should be noted that event the Legal Service of the Commission has doubted lawfulness of the proposed amendments. Nevertheless, without prejudice of the issue of lawfulness of amendments in detail, there is willingness to understand the result that the Directorate-General for Energy is pursuing with these amendments.

One of the defined goals is promoting competition. Under the amendments, the owner of infrastructure will be obliged to provide access to the infrastructure owned by it not only in the territory of the EU, but outside it as well. For example, a private underwater gas pipe operator will have to provide the other sellers of gas with the opportunity to transport gas over the pipeline owned by it. This means provision for a connection and capacity guarantees. Thus, the private operator would not be able to use the pipeline that has not crossed the borders of the EU for its own needs only. As the result, the amount of infrastructure available to sellers of gas would expand even more and the number of suppliers in the EU as well as competition between the suppliers from the same geographical gas extraction territory would have to increase, which should result in price competition and reduce the price of gas for Europe. One should admit that the idea is not bad by any means, if everything would happen, as it should. However, there are several buts, and they explicitly reduce attaining the goal to a minimum. This makes one think that, most probably, there are also other goals, and this one is more for a façade.

The currently existing or prospective underwater pipelines connect the EU gas infrastructure to such countries as Russia, Lebanon and Algeria. In these countries in general, or within the particular projects, the supply (export) of gas is a monopoly of one particular company. Consequently, no competition is possible in the supply of gas from these countries until legal regulation there is changed. Thus, the proposed amendments to the Gas Directive will impose a duty to a private pipeline operator, which will affect its business, but will not attain the goal as to its merits.

The private gas pipeline operator will be obliged not to use the pipeline owned by it to full extent because it will have to reserve capacities for third parties. While reserving capacities means potential reduction of income and smaller amount of gas supply to the EU by the particular supplier. This means reducing competitiveness of the private operator compared to other competing types of gas transmission (transport). For instance, compared to other land gas pipelines. Or compared to transporting gas on a ship. The supplier of gas can surely count on the capacity of the ship because the carrier is not obliged to reserve capacities for other suppliers. This, in turn, directly affects (reduces or prevents increasing) the amount of supply by the monopoly export companies of the particular countries and generated unreasonable advantages and market power for other suppliers, which may, inter alia, even increase the price. Thus, the amendments may result in reducing and deforming competition in the EU gas market, which, it seems, is a result right opposite the goal proposed initially.

In the event of a new or existing infrastructure, the capacity of which is substantially increased, there is an opportunity to request the regulatory authorities to temporary suspend the duty to provide access to third parties. However, the exception may be applied only temporary, granting the exception is individual and the criteria to assess are subject to extensive interpreting; moreover, the process is time-consuming. Therefore, it will not resolve the issue in general.

Summarising the above discussion, it should be concluded that not only lawfulness of the proposed amendments to the Gas Directive is doubtful, but in the particular market situation they do not promote competition as well, which, subject to fair conditions for competition, is required to increase the number of suppliers and their mutual competition, thus attaining energy dependency on several suppliers. It is possible that the amendments will result in establishing a mechanism to attain, if not minimising dependency on individual suppliers of gas, then at least one additional disciplinary tool against them. Nevertheless, as suggested by the analysis, the proposed solution could not be the one promoting competition, just the opposite – it could generate unreasonable advantages for companies, to which this disciplinary tool will not be applied. The approach like this does not provide opportunities for fair competition in the conditions of free market – it looks more like a mechanism that would ensure covered political interference that will be implemented by means of companies and at their expense. I believe this is not fair. If there is a need for political interference then there must also be political courage and willingness to implement it. One has to conclude again that understanding of promoting competition on the political level can substantially differ from competition as understood by the companies.