The European Union will in the coming weeks give its final approval to its third energy liberalisation package, aimed at pushing member states to unbundle their national energy utilities and de-couple generation and supply, of both electricity and fuel, from transmission grids.

Typically for the EU, the package is a compromise brokered to keep those member states which are attached to their 'national champions' happy, while ensuring as level a playing field as possible in Europe's energy markets.

The package - expected to be approved by the Council of Ministers in the coming weeks - will give national governments a choice of three routes to follow in increasing the competitiveness of their energy markets.

Crucially, however, the European Commission retains the right - through its competition laws - to enforce greater unbundling where it sees a specific threat to a competitive market.

The threat of action from the European Commission's antitrust laws is no toothless tiger - German utilities E.ON and RWE have already struck deals to divest parts of their companies in order to avoid a suit.

What are the competitive issues?

Two cases have in recent months brought the issue of energy unbundling in the EU into sharp focus - and both are in the German market.

On 26 November the European Commission accepted an offer from E.ON to divest around 5 000 MW of its generation capacity to address the Commission's concerns regarding the generation market, and to divest its extra-high voltage network to meet the concerns on the electricity balancing market.

The Commission had had concerns that E.ON may have withdrawn available generation capacity from the German wholesale electricity markets in order artificially to raise prices, and had also deterred new investors in generation.

Furthermore, it had concerns that E.ON may have favoured its production affiliate for providing balancing services in the transmission grid, while passing the resulting costs on to final consumers, and preventing other power producers from exporting balancing energy into its transmission zone.

E.ON will carry out the sale of its assets under the supervision of a trustee, who will verify in particular that none of the acquisitions would raise competition concerns. A number of further requirements have to be met by the potential buyers of the assets to be divested. All buyers have to be approved by the Commission.

In the case of RWE, the Commission had concerns that RWE may have abused the dominant position on its gas transmission network to restrict its competitors' access to the network. The Commission's suspicion related to a possible refusal to supply gas transmission services to other companies and to behaviour aiming at squeezing the margins of RWE's downstream competitors in gas supply.

In reaction to the Commission's concerns, RWE has offered to divest its entire Western German high-pressure gas transmission network.

These two cases provide examples of the Commission's concerns around European energy networks. ENI in Italy, and GDF in France, are also currently the subject of Commission enquiries.

The new regulatory package will aim at unbundling the industry in order to meet the Commission's concerns - though Competition Commissioner Neelie Kroes will reserve the right to step in where monopoly issues still remain.

Third package - three options

The proposed legislation offers three options to member states to unbundle their energy utilities - with varying degrees of severity.

Peter Willis, partner and head of EU & Competition for the law firm Dundas & Wilson, has devised a graphic showing the three options - reproduced below (click to enlarge):

On the left is the Competition Commissioner's preferred option - full ownership unbundling. Under this option, generation and supply are entirely separated in ownership from the transmission system. The call-out box to the right of the column details the conditions of the separation.

The middle option is the Independent System Operator (ISO) model. This allows for transmission grid ownership to remain with generation and supply owners, but a separately-owned system operator.

Within the generation/supply and transmission owning company, there will also be a - strongly reinforced - 'Chinese Wall'.

The final model allows for no unbundling, but for a reinforced Chinese Wall separating generation and supply from operation of the transmission system. Under this model, a long set of conditions separates the two parts of the single entity.

Future implications

Peter Willis says: "I don't think we'll see complete unbundling made mandatory across the board this time around - but there will be a fourth round."

The European Commission, he says, is "also likely to look further eastward, to Central Europe" where unbundling has so far made a lot less progress than in countries like the UK and the Nordics.

Even with the negotiated compromise that the third package represents, the European Commission will use whatever opportunity it can to make countries enforce the left hand option of the diagram - full unbundling.