MULTILEVEL EU GOVERNANCE IN ENERGY INFRASTRUCTURE DEVELOPMENT:

A New Role for ACER?

Siddharth Fresa Sapienza University of Rome – Stanford Law School

siddharth.fresa@gmail.com

WORKING PAPER Prepared in relation to the conference:

“The 2020 Strategy Experience: Lessons for Regional Cooperation, EU

Governance and Investment”

Berlin, 17 June 2015 DIW Berlin, Mohrenstrasse 58, Schumpeter Hall

Multilevel EU Governance in Energy Infrastructure Development:

A New Role for ACER?

Siddharth Fresa*

Keywords: Energy infrastructure, European Union, Energy Union, Energy policy, Multilevel gov-ernance, ACER.

Abstract

In order to minimize the risks connected to the exponential expansion of intermittent renewa-ble energy sources, European policy makers have agreed on the urgent need of increasing the interconnection of Europe’s electricity grids. However, the current European energy govern-ance is characterised by a variety of institutional players having concurrent or even conflict-ing interests, linked by a complex network of responsibilities and delegation of powers. Ana-lysing and understanding the current governance structure is therefore essential to identify and prevent the development of regulatory practices that could negatively affect the integra-tion of Europe’s energy markets. This paper focuses on the issues of infrastructure develop-ment in the electricity sector and shows that a more centralised governance structure could be beneficial to better achieve the ambitious European energy targets. In particular, the paper looks at the issues arising from the multi-level decision making process relating to the Cross-Border Cost Allocation of key infrastructure projects, demonstrating that increasing ACER’s role in the decision-making process would not only allow to increase regulatory harmoniza-tion and the adequate representation of EU interests in the process, but would also create a more efficient administrative procedure and reduce the risk of regulatory capture.

* LLM at Stanford Law School and PhD Candidate at Sapienza University of Rome. siddharth.fresa@gmail.com - +16506563026 - 566 Arguello Way, Apt. 137D, 94305, Stanford, CA, USA.

TABLE OF CONTENTS

1. INTRODUCTION 4

1.1. European Energy Policy in a Nutshell 4

1.2. The European Energy Infrastructure Plan 5

1.3. Delivering effective energy policy: the European challenge 6

2. EU ENERGY INFRASTRUCTURE GOVERNANCE 7

2.1. EU Commission 7

2.2. National Regulatory Authorities 8

2.3. Transmission System Operators 9

2.4. The Agency for the Cooperation of European Regulators 10

3. EU INFRASTRUCTURE GOVERNANCE IN ACTION 11

3.1. Cross-Border Cost Allocations 11

3.2. Analysis of CBCA Governance Issues 12

4. A NEW ROLE FOR ACER? 13

4.1. Centralising EU Infrastructure Governance 13

4.2. The Benefits 15

4.3. The Challenges 19

5. CONCLUSIONS 20

6. REFERENCES 1

1. Introduction 1.1. European Energy Policy in a Nutshell

The European Union’s (EU) energy policy rests on the three key objectives of ob-

taining affordable, secure and sustainable energy. These common goals have been

pursued through a policy strategy based on the reduction of CO2 emissions, the pro-

motion of energy efficiency and renewable energy sources (RES) and the develop-

ment of a liberalised Internal Energy Market (IEM).

The EU mandated support for RES has attracted unprecedented levels of invest-

ment in RES in most of Europe1. The recently released 2030 Framework for climate

and energy policies has proposed even more ambitious RES targets, aiming at an

overall 27% RES energy consumption by 2030 (Commission, 2014a).

The question on how such a high percentage of RES generated electricity will be

integrated in the European energy networks becomes of paramount importance, espe-

cially when taking into account that the projected growth of RES production will

largely derive from wind and solar power.

Intermittency and remoteness from consumption centres of utility scale RES have

long been identified as the primary concerns. European policy makers have agreed

that the most effective way to address these challenges is to increase the interconnec-

tion of Europe’s national energy markets through investment in transmission infra-

structure and systematically addressing cross-border issues through harmonized rules

and standards.

It is expected that the increasing demand, guaranteeing energy security and com-

pleting the de-carbonization process will require over €200 billion of investments in

the next decade (“European Union Investments Needs”, 2011). This much needed

capital will contribute to the expansion in the deployment of RES in Europe by mak-

ing cheaper RES generated electricity more easily accessible to the wider European

market, simultaneously minimising reliability concerns and enhancing European wide

competition.

1.2. The European Energy Infrastructure Plan

The increase penetration of RES is not however the only concern facing European

policy makers. Underinvestment in Europe’s ageing electricity infrastructure, espe-

cially following the financial crisis, has been subject to careful scrutiny in the past

years (Chorafas, 2012 p. 43). Its out-dated technology and the numerous bottlenecks

have been cause of inefficient transmission of electricity between Member States, iso-

lation of the national energy markets and have slowed down the development of

competition (Commission, 2001). EU Institutions have unanimously stressed the im-

portance of developing interconnection infrastructure, often reiterating the need to

fast-track the completion of the IEM.

In 2011, the EU Commission first proposed the Trans-European Network Regula-

tion (TEN-E Regulation, 2013), that mapped the primary energy infrastructure needs

and introduced measures to accelerate the most strategic projects by cutting the red

tape and providing EU funding.

In particular, the EU identified twelve energy ‘priority corridors’, five of which

specifically intended to address the urgent infrastructure needs of Europe’s electricity

grids in order to strengthen cross-border interconnections and promote the integration

of RES.2

In order to develop the energy priority corridors, the EU Commission identified,

following the input of all the major regulatory stakeholders, a list of Projects of

Common Interest (PCIs) that were considered strategic for the development of the

IEM because of their significant cross-border impacts.3

The projects, if carried out, will benefit from a streamlined permitting process,

managed by a single national authority consequently increasing their visibility and

attractiveness for investors, as well as the possibility of receiving funding through the

newly created Connecting Europe Facility (CEF).4

The TEN-E Regulation encouraged cooperation among the different regulatory

stakeholders to tackle the main issues arising from cross-border infrastructure devel-

opment such as the cumbersome permitting processes that increase transaction costs

and inhibit investments.

The commitment to optimise network development was recently strengthened by

the European Council and by the Commission that reiterated the importance of reach-

ing the minimum target of 10% interconnection by 2020, as well as suggesting an in-

crease to 15% by 2030 (Energy Union Package, 2015).

1.3. Delivering effective energy policy: the European challenge

Despite the general enthusiasm that has accompanied the plans for the develop-

ment of a more integrated European energy infrastructure network, energy policy is

still a contentious topic in European politics.

Member States have traditionally claimed an exclusive regulatory prerogative in

the energy sector, arguing that national security concerns dictated that such compe-

tence should remain with the individual states.

The division of competences between the EU and the Member States in the energy

field was thus a sensitive issue. Most notably, it has been abundantly clarified that

decisions regarding a nation’s energy mix and the external dimension of EU energy

policy remain a prerogative of the Member States (Commission, 2014b). Decisions

regarding regulatory harmonization, on the other hand, have been devolved to the

EU, with Third Energy Package (2009) representing a successful effort in fostering

the completion of the IEM.

The resistance of most Member States to devolve further sovereignty to the EU in

the energy sector has created a complex governance structure that was the result of a

carefully negotiated balance of powers, where European policy makers strived to in-

crease uniformity of implementation albeit resisting the more politically challenging

centralisation of the decision making processes (Eberlein, 2008).

Given that most interconnection projects will fall under the jurisdiction of more

than one Member State, regulatory differences will be a prevailing challenge. The

Juncker Commission has stressed that the EU can no longer have energy rules set at

the European level but applied by 28 different regulatory frameworks (Energy Union

Package, 2015). This will also require a change in the MS’s infrastructure expansion

policies shifting from an inward looking domestic focus to an integrated European

planning strategy.

Indeed, the success of the Commission’s investment plan will largely depend on

how the EU and its Member States will be able to create a favourable investment cli-

mate to incentivise private undertakings to finance this massive infrastructure gap.

The current energy governance structure is characterised by a variety of institu-

tional players having concurrent or even conflicting interests, linked by a complex

network of responsibilities and delegation of powers.

Analysing and understanding the current governance structure is therefore essen-

tial to identify and prevent the development of regulatory practices that could nega-

tively affect the integration of Europe’s energy markets. This paper will focus on the

issues of infrastructure development in the electricity sector and it will attempt to de-

termine whether a more centralised governance structure could be beneficial to better

achieve the ambitious European energy targets.

2. EU Energy Infrastructure Governance

It is possible to identify four key institutional actors that are responsible for the

advancement of the IEM and the development of Europe’ energy infrastructure: (i)

the EU Commission; (ii) the National Regulatory Authorities (NRAs); (iii) the

Transmission System operators (TSOs) and (iv) the Agency for the Cooperation of the

European Regulators (ACER). This section will illustrate the main responsibilities of

these actors, particularly in relation to the development of energy infrastructure under

the TEN-E Regulation.

2.1. EU Commission

As the main executive body of the EU, the Commission has a central role in the

determination and implementation of Europe’s energy policy. Several of its Direc-

torates General (DGs) share competences in the energy sector with the DGs Energy

and Climate enjoying the majority of the responsibilities.

Another heavily involved Directorate is, without doubt, DG Competition. Before

the liberalisation process began effectively to take place, competition policy was the

only tool available to the Commission to exercise influence in the energy markets

(Adrien De Hauteclocque, 2013).

The Commission is one of the principal actors in carrying out the completion of

the IEM. In addition to having a key role in the implementation of the unbundling and

third-party network access rules (Electricity Directive, 2009, Articles 9 and 32), the

Commission was ultimately responsible in determining which projects would gain

PCI status (TEN-E Regulation).

The Commission’s monitoring and policy settings responsibilities have been es-

sential in the harmonisation and streamlining of the permitting and environmental as-

sessment procedures.

The Commission is further responsible determining amount of financial assistance

to be granted to the projects selected as well as the conditions and methods for their

implementation (Regulation 1316/2013, Article 18).

Finally, pursuant to Article 258 of the Treaty on the Functioning of the European

Union (TFEU), the Commission may ensure the compliance to European regulations

by initiating infringement proceedings against any Member State that has failed to

fulfil its obligation.

2.2. National Regulatory Authorities

National Regulatory Authorities (NRAs) were strengthened by the Third Energy

Package (2009) in response to their ineffectiveness in preventing non-discriminatory

network access and uniformly supervising market operators (Electricity Directive

2009, Preamble). The difficulties in guaranteeing a homogenous application of the

European rules, were mainly attributed to the insufficient powers and discretion of

NRAs, exacerbated by a frequent lack of independence from their governments (Elec-

tricity Directive 2009, Preamble).

The Third Energy Package (2009) made significant changes, expanding NRAs du-

ties and obliging Member States to enact measures that would guarantee NRAs the

ability to carry out their functions effectively.5

Currently NRAs are responsible for (i) determining transmission and distribution

network access tariffs; (ii) monitoring the unbundling requirements and, more gener-

ally, overseeing of energy companies; (iii) consumer protection and (iv) the imple-

mentation of, and compliance with, legally binding decisions of the commission or

ACER.

With regards to the development of cross-border infrastructure NRAs have a fun-

damental role in the permitting and tariff calculation processes. In particular, NRAs

are responsible the Cross-Border Cost Allocation (CBCA) process as well as the

recognition of any regulatory incentives necessary for the development of PCIs that

are not autonomously commercially viable (TEN-E Regulation, 2013).

2.3. Transmission System Operators

Transmission System Operators (TSOs) are responsible for the wholesale transfer

of electricity or natural gas from the point of production or importation to the points

of distribution.

The role of TSOs has fundamentally changed following the implementation of the

Third Energy Package. Historically, in fact, the functions performed by TSOs were

carried out by the national vertically integrated utilities. The liberalisation process

required the functional separation of transmission activities from the generation and

supply activities to prevent possible foreclosing behaviours typical of network indus-

tries (Third Energy Package, 2009). The unbundling process created independent

TSOs, responsible for the management and development of the national high-voltage

network and all its related investments. This key role implies that TSOs will normally

be the entities involved in the submission of PCI projects and the application to the

related EU grants.

TSOs will participate in negotiations with all regulatory stakeholders with regards

to their own investments as well those carried out by merchant operators by providing

the necessary information and technical support on the grid.

In the context of developing an interconnected European energy market, TSOs

have been awarded other important responsibilities. In particular, with the creation of

the European Network of Transmission System Operators for Electricity (ENTSO-E),

the Electricity Regulation (2009) conferred TSOs the responsibility of developing

Network Codes to set uniform rules for the use of transmission infrastructure allow-

ing all network operators, generators, suppliers and consumers to operate more effec-

tively throughout Europe (Electricity Regulation, 2009, Article 6).

ENTSO-E is further in charge of adopting a Ten-Year Network Development Plan

(TYNDP), a biennial programmatic document that identifies the most pressing infra-

structure gaps from a European perspective allowing for project promoters and regu-

latory stakeholders to best priorities investments efforts to maximize network-wide

impacts (Electricity Regulation, 2009, Article 8).

2.4. The Agency for the Cooperation of European Regulators

The Agency for Cooperation of Energy Regulators (ACER) was established with

the Third Energy Package with the primary purpose of closing the regulatory gap that

existed in relation to the NRAs’ ability to deal effectively with cross-border energy

issues (Macedo, 2011).

The creation of ACER was nevertheless surrounded by great controversy. In its in-

ception, Member States could not find a consensus on the model of regulatory agency

that the Commission had proposed (Council, 2007). Several Member States went as

far as being ‘concerned’ (Council, 2008) with the powers that were being discussed

for ACER, leading the Council to successfully limit the decision making autonomy of

the Agency (Ermacora, 2010).

The challenging negotiations among the European institutions resulted in the adop-

tion of the ACER Regulation (2009) that created an agency with primarily consulta-

tive functions and with limited binding decision-making powers. ACER is thus de-

void of a standalone regulatory role, but rather acts as a forum to encourage coopera-

tion among NRAs. This is perhaps best reflected in ACER’s governance structure

where key regulatory policy decisions of the Agency must be approved by the Board

of Regulators, operated by senior representatives of the NRAs.

The promotion of cooperation among NRAs is carried out principally by the ex-

change of information and best practices (ACER Regulation, 2009). ACER further

provides interpretative advisory guidance on EU energy rules and a peer-review sys-

tem for the NRAs (Electricity Directive, 2009, Article 39).

Finally, ACER exercises residual decision making authority with regards to (i)

regulatory Exemptions (Electricity Regulation, 2009) and (ii) the terms and condi-

tions for access to and operational security of cross-border infrastructure. In these in-

stances, however, ACER will only be able to exercise its jurisdiction if the NRAs are

unable to reach an agreement within six months (ACER Regulation, 2009, Article

8(1)-(3),(5) and Article 7(7)).

Under the TEN-E Regulation (2013) ACER’s responsibilities were expanded to in-

clud important monitoring and advisory functions. ACER must for example monitor

the progress achieved in implementing the PCIs and make any necessary recommen-

dations to facilitate the completion of such projects (TEN-E Regulation, 2013, Article

5). In addition, it provides an opinion in the selection of the PCIs, ensuring that the

criteria and the CBA is applied consistently across the various regions.

Finally, the TEN-E Regulation assigns an additional residual decision making

power to ACER with regards to decisions relating to CBCAs.

3. EU Infrastructure Governance in action

The multitude of actors, interests and responsibilities has inevitable repercussions

on the complexity of the decision making processes. Indeed, the European infrastruc-

ture governance is often characterized by multistep procedures that require the input

or determinations of multiple stakeholders, creating a process paradoxically in con-

trast with the streamlining spirit of the regulations.

An illustrative example is the process relating to the CBCA of PCIs pursuant to the

TEN-E Regulation.

3.1. Cross-Border Cost Allocations

Cross-border cost allocations decisions relate to the apportioning of the costs

sustained by the project promoters. The introduction of the requirement of performing

a Cost-Benefit Analysis (CBA) for the selection of PCIs under the TEN-E Regulation,

has encouraged the departure from the traditional cost allocation model based on the

premise that each Country is simply responsible for costs associated with the assets

located in its territory (Meeus & He, 2014).

By allowing the possibility for investment costs to be allocated outside the host-

ing countries, the TEN-E Regulation encourages innovative CBCA mechanisms that

incentivize the realization of valuable interconnections that otherwise would struggle

to be completed because of financing challenges (Robert Schroeder, 2015).

In particular, Article 12 of the TEN-E Regulation provides that the “…efficiently

incurred costs…” of such PCIs that are not covered by the charges levied on the net-

work users, should be borne by the TSO or project promoter of the Member States to

which the project provides a net positive benefit.

In order to determine the net-positive impact of a PCI, the CBA takes into account

a variety of benefits, such as: (i) increases in security of supply; (ii) avoidance of

generation curtailments; (iii) reductions of national constraints; (iv) avoidance or de-

layed of investments; (v) increased reliance and grid safety; (vi) environmental sus-

tainability or (vii) the effects on competition and market power (ACER, 2013a).

The determination of the CBCA is left to the NRAs of the Member States where

the PCI will have the most significant economic impacts. Upon request of the project

promoters, the NRAs must evaluate the project’s CBA and financial viability to de-

termine to what extent each relevant Member State will have to bear the costs of the

project.

The NRAs’ decisions take into consideration the Minimum Standards contained in

ACER’s Recommendation No 7/2013 that aims to encourage the use of a consistent

CBCA methodology and minimize delays (ACER, 2013b). If the NRAs are neverthe-

less unable to reach an agreement within six months from the request of to TSO or

project promoter, the CBCA is decided by ACER, within a period of three to five

months (TEN-E Regulation, 2013, Article 12).

3.2. Analysis of CBCA Governance Issues

The CBCA is a complex process that is based on a series of multiparty negotia-

tions involving the TSOs and NRA of the Member States where the project is located,

as well as the regulatory actors of any other Member State that experience net-

positive benefits.6

The CBCA is thus inherently subject to the risk of opportunistic behaviours. The

TSOs or NRAs that have greater expertise and bargaining powers will naturally be

interested in achieving a cost allocation that is most favourable to them and not nec-

essarily one that would maximise the joint value of all the participating parties.

In addition, the current system of CBCA facilitates an unjustified reliance on CEF

funding. ACER’s CBCA Minimum Standards provide that only the Member States

that experience a positive net benefit of at least 10% will be required to contribute to

the costs.

The CBCA decisions to date have shown the tendency of NRAs to adopt incom-

plete CBCA decision that do not assess in detail the net-benefits of the Member States

not directly involved in the project (Meeus & Keyaerts, 2015 c.s.). This has led to

multiple NRAs to seek CEF grants to cover the financing gap, without assessing

whether a net-benefitting Member State should be asked to provide compensation.

The possible contrasts in negotiations or lack of a well-defined CBCA can cause

delays or stops in the works of the PCIs. Indeed, in many cases the CBCA assumed

that the project would receive CEF funding, possibly causing further delays if the

funding does not materialize (Meeus & Keyaerts, 2015 c.s.). Long delays could even

change the nature of the existing benefits causing the CBA to be inaccurate, requiring

an entirely new CBCA to be performed (Robert Schroeder, 2015).

Such concerns are only exacerbated by the risk of the back and forth between the

NRAs and ACER. The resulting uncertainty could ultimately affect the incentives of

private investors to bridge the financing gap if the EU wide credibility is reduced by

cost sharing decisions that are based on uncertain or non-homogenously determined

benefits.

4. A New Role for ACER?

4.1. Centralising EU Infrastructure Governance

It is clear that the completion of the IEM and the achievement of its ambitious tar-

gets will require a fundamental re-thinking of the roles of the numerous institutional

actors. The current multi-level decision-making process should be better designed to

advance the development of energy infrastructure and create as little barriers to in-

vestment as possible.

The Commission has recently recognised the immediate need of aligning regula-

tion to prevent market distortions and fragmentation, advocating for a more central

role of ACER (Energy Union Package, 2015).

Specifically referring to decisions relating to Cross-Border Cost Allocations, the

Commission has argued that ACER’s regulatory functions should be sufficient to en-

able it to ‘effectively oversee the development of the internal energy market [and]

deal with all cross-border issues necessary to create a seamless internal market’ (En-

ergy Union Package, 2015).

The more central role envisaged by the Commission for ACER in relation to

CBCA could arguably be seen as unnecessary. Indeed, of the 14 PCIs that have un-

dergone the CBCA process, 12 were settled by a coordinated decision of the NRAs

and only two needed to be decided by ACER (Pototschnig, 2015).

While these numbers would seem to suggest that the current decision making pro-

cess has yielded efficient results, a careful analysis shows that the resulting decisions

are not as indicative as one might hope.

In particular, none of the 12 CBCAs that were settled by a coordinated decision of

the NRAs regarded projects with net-losers (Meeus & Keyaerts, 2015). In other

words, no contrasts could have arisen from the CBCA as no Member State was nega-

tively affected by the construction of the particular PCI. Indeed, in the two cases

where net-losses were identified, the NRAs were unable to reach a concurrent deci-

sion within the prescribe timeframe.

Furthermore, 10 of the 12 coordinated decisions regarded internal projects that had

no cross-border elements (Meeus & Keyaerts, 2015). The allocation of the costs was

thus based exclusively on the net benefits brought to a particular Member State with

no real need of performing a re-allocation of the costs.

In addition, in those cases where the CBCA concluded that the net benefits were

too dispersed to have been calculated appropriately, the NRAs relied heavily on the

fact that the ‘financing gap’ would be closed by the CEF, automatically assuming

that the funding would be granted (Meeus & Keyaerts, 2015).

The CBCA is certainly more controversial where a net-looser is present. Thus far,

in both cases where a net-looser was identified (ACER, 2014 and 2015a) the NRAs

were unable to reach an agreement within the prescribed six months, compelling

ACER to make the final decision.

The CBCA performed by ACER created an inevitable duplication of the work. The

same documents had to be reviewed twice and stakeholders were called in to give

their input a second time with regards to all the aspects of the CBCA. ACER’s review

went as far as to carry out ‘an in-depth analysis…including with the use of new pa-

rameters, values and information’, demonstrating a lack of coordination in the calcu-

lation methods (ACER, 2015a, para. 186, 196).

It is true that an analysis based on such a limited number of CBCA can only yield

anecdotal evidence and that it is impossible to know ex ante how many PCI will ac-

tually cause net-losses. Although unlikely, it is possible that future PCI will require

uncontroversial CBCA, negating the need of changing the current system. Neverthe-

less, it is intuitively possible to conclude that, due to the delicate nature of the inter-

ests represented in a CBCA, conflict among NRAs will likely occur, when there is a

net-loser.

The lack of consistency of the CBCAs and the ensuing delays are easily avoidable

by making ACER directly responsible of all CBCA decisions. This would however

not necessarily remove the NRAs from the decision making process, as they would

continue to have a support role, sharing their expertise and data in aid of ACER.

The streamlining of the CBCA decision-making process would not only allow to

increase regulatory certainty and the adequate representation of EU interests in the

process, but would also create a more efficient administrative procedure and reduce

the risk of regulatory capture.

4.2. The Benefits

Increasing ACER’s decision-making power would most obviously facilitate the

harmonization efforts in the CBCA process and more generally in the implementation

of the TEN-E Regulation.

While it is true that ACER’s Recommendation 7/2013 provides a unified set of

guidelines that all NRAs agreed on through the adoption by the Board of Regulators,

such guidelines are by no means binding or enforceable. Arguably NRAs will only

comply with Recommendation 7/2013 insofar as it does not affect their ability to suc-

cessfully protect their interests.

Indeed in the CBCA relating to the Gas Interconnection between Poland and Lith-

uania (PCI 8.5), the NRA’s proposed a CBCA that markedly deviated from the guide-

lines, specifically in relation to the compensation to be provided to project promoters

and on the allocation of compensation between the contributing countries (ACER,

2014).

Departures from such core elements of the Recommendation could greatly affect

the consistency of the outcomes of the CBCA and the levels of the impact on tariffs,

harming regulatory certainty and investor trust.

Centralisation of processes like CBCA becomes especially valuable when taking

into consideration the great spectrum of resources and technical skills of the various

NRAs. Allowing ACER to act with decision-making autonomy would guarantee that

all CBCAs will be performed with the same level of expertise and resources as well

as limiting the ability of NRAs to exploit possible bargaining power imbalances.

The centralisation of the CBCA process would also allow a more adequate repre-

sentation of EU interests from the very first stages of the negotiations. As mentioned

above, the CBCAs that have been decided so far, rely heavily on CEF funding be-

cause the benefits were too dispersed or too difficult to calculate. For example in the

cases of Latvian-Estonian electricity interconnector (PCI 4.2.1) and Estonian internal

electricity line (PCI 4.2.2), the NRAs agreed that 75% of the total investments costs

are to allocated to CEF (Meeus & Keyaerts, 2015).

The limited EU funding available should be accessed on the basis of a consistent

application of the CBCA process that maximizes joint gains by correctly weighing

the interests of the Members States and those of the EU as whole. As the Energy Un-

ion expands and integration increases, it will be progressively more difficult to de-

termine which Member State will have to contribute to the costs of the infrastructure

and the current CBCA process is not designed to minimize inconsistencies and pre-

vent systematic failures.

Centralisation thus represents the most adequate system to apportion responsibili-

ties without overburdening the available funding mechanisms. It further allows to

take into consideration the wider EU effects and prevent NRAs from declining to par-

ticipate in CBCA process like in the case of the Italian and French regulators in the

PCIs 5.10 and 5.12 relating to the Interconnection on TENP pipeline in Germany

(Meeus & Keyaerts, 2015).

The third benefit derivable from centralisation is administrative efficiency. Exten-

sive literature has shown that coordination and centralisation allow to significantly

reduce administrative decision making and transaction costs by (i) streamlining dis-

putes and reducing monitoring costs and (ii) creating regulatory economies of scales

and preventing inefficient duplication of work (Freeman & Rossi, 2012).

While it is true that research points to decentralisation as the best system to repre-

sent the specific needs of different regions, centralisation will yield higher benefits

when (i) there are great inter-regional externalities and (ii) the different regions are

relatively homogenous (Oates, 1972 and Lockwood, 2004).

The nature of the EU energy policy goals indicate that centralisation could bring

positive net benefits. Reducing the infrastructure gap will make the needs of the vari-

ous regions progressively more homogenous and the increasing interconnection be-

tween Europe’s energy markets will yield greater inter-regional externalities as the

shortcomings or failures in one region will have an impact on progressively larger

areas.

As Freeman and Rossi (2012) further suggest, centralisation is unwarranted in the

limited cases in which the creation of a new agency would be too costly or in which

the coordinate outcome of the decision by multiple agencies would mirror the out-

come that the lawmaker would reach when bargaining among themselves.

Such scenarios hardly apply in the case of ACER. While taking on more responsi-

bilities would entail a larger budget, such costs would be unlikely to be prohibitive.

Furthermore, the ultimate goals of the TEN-E Regulation suggest that EU lawmakers

could only be in favour of a more effective process to fast-track the completion of the

required infrastructure projects.

Furthermore, the peculiarities of the EU infrastructure development process limit

the benefits of a decentralised model identified by Freeman and Rossi (2012). The

adversarial nature of the CBCA process makes it challenging to benefit from con-

structive inter-agency competition and the bargaining power imbalances and the dif-

ferences in expertise and resources of the NRAs will limit the opportunities for agen-

cy compromise.

Finally, centralising the CBCA process could positively address the risks of regu-

latory capture and arbitrage. In particular, it is suggested that centralisation would

reduce the risk of regulated entities influencing the single NRAs or taking advantage

of the NRA’s shared jurisdiction to achieve the best possible deal.

Commentators have traditionally argued that a decentralising decision-making

process may reduce the risk of capture by forcing interests groups to disperse their

lobbying efforts among a greater number of agencies (Laffont & Martimort, 1999).

Nevertheless, economic literature has shown that centralisation can lead to increase

the accountability of decision makers and reduce aggregate political rents (Boffa, Pio-

latto & Ponzetto, 2013).

The non-federalist structure of the EU however is decisive in assessing the benefits

of centralisation. Interest groups in the energy sector in Europe are historically con-

nected to a single Member State and the incumbent operators, TSOs or national pro-

ject promoters will, in most cases, have strong existing ties with the NRA.

The interest groups’ lobbying efforts are thus more likely be successful in a na-

tional setting than at the European level. Competition of interests among the regulat-

ed entities at the EU level inhibits joint lobbying efforts, abstracting ACER from the

most common concerns of regulatory capture in a centralised governance settings as

identified by Sirico Jr Louis (1980).

4.3. The Challenges

Increasing ACER’s decision-making autonomy is, nevertheless, faltered by three

main practical challenges: (i) funding and personnel; (ii) Treaty delegation of powers

limitations and (iii) political acceptability.

Currently, ACER has a budget of approximately €11 million and 80 staff members.

These numbers are going to increase to approximately €20 million and 115 staff due

to the new responsibilities of ACER under the REMIT Regulation (2011) with re-

gards to wholesale energy market integrity and transparency (ACER, 2015b).

Considering the imminent adoption of the second PCI list (“Projects of Common

Interest”, 2015) and the increasing number of CBCA that will be requested, ACER's

resources will need to be additionally increased. However, its positive track record

and the relative cost efficiency under which the Agency has operated so far, suggest

that further increasing the budget and staff, will not be an insurmountable barrier.

A similarly positive conclusion can be adopted in relation to the legal challenges

that could prevent the greater decision-making autonomy of ACER. Indeed, the limi-

tations to the EU delegation doctrine in Meroni (1956) have long been thought to be

anachronistic in light of the growing complexities of the EU Governance (Hatzopou-

los, 2012, p. 325). Indeed, as Pelkmans and Simoncini (2014) suggest, the Meroni

doctrine has frequently been used as an ‘excuse’ to stall or prevent discussions on the

changing regulatory needs of EU agencies.

Recent jurisprudence of Court of Justice of the European Union (CJEU) has for-

mally acknowledged the inadequacies of the Meroni doctrine, recognising in Short-

selling (2014), that the TFEU does not limit the delegation of executive powers to the

Commission.

Attributing more power to ACER would thus seem increasingly likely to pass con-

stitutional scrutiny, especially given the specific technical and professional nature of

the Agency’s expertise (cfr. Short-selling, 2014, paras. 82-83). After all, if a truly in-

tegrated and functioning single energy market is the ultimate goal of the EU and its

Member States, the delegation doctrine should be applied in such a way to enable in-

tegration to occur effectively and efficiently.

Unfortunately, political acceptability will persist as a main challenge. The vested

interests of Member States in the energy sector will remain strong, especially in the

currently challenging energy security environment.

Nevertheless, the IEM and ACER have come a long way from 2009 and it is pos-

sible that the grievances of some Member State would resonate less in the Council

today. In addition, the European Parliament has long been in favour of granting

ACER more powers (European Parliament, 2008) further legitimising the recently

expressed position of the Commission in the matter.

While energy policy has historically been hesitant to follow the path to integration,

it is clear that more centralisation is desirable in the future, at least in relation to

cross-border and wholesale energy issues.

5. Conclusions

The creation of ACER was met with abundant scepticism and suspicion. However,

six years down the line, the views of NRAs and Member States seem to have evolved

considerably. It could be argued, indeed, that ACER has successfully passed the ini-

tial “adjustment” phase having proven itself in the areas in which it currently has re-

sponsibilities.

While the idea of increasing centralisation might not be accepted by some Mem-

ber State, there are several compelling reasons to support increasing ACER’s deci-

sion-making autonomy. Indeed, many of the considerations relating to the CBCA can

be transferred to other areas in which ACER has residual decision making powers.

Harmonisation and consistency could, for example, greatly benefit the EU energy in-

frastructure exemption regime (Hancher, 2011).

The ambitious goals of the European Energy Policy need to be pursued on a united

front, promoting competition and harmonisation, particularly when it comes to guar-

anteeing investor security in financing the required interconnection infrastructure.

Perhaps, a stronger ACER, appropriately backed by the Commission and the Europe-

an Parliament, might just do the trick.

1 For detailed statistics see ECOFYS, Renewable Energy: a 2030 scenario for the EU, November 2012, p. 3-4, available at http://www.ecofys.com/files/files/ecofys-2013-renewable-energy-2030-scenario-for-the-eu.pdf, last accessed 27 May 2015. 2 The five electricity priority corridors are identified in Annex I of the TEN-E Regulation and consist of (i) the Northern Seas offshore grid; (ii) the North-South electricity interconnections in Western Eu-rope; (iii) the North-South electricity interconnections in Central Eastern and South Eastern Europe; (iv) the Baltic Energy Market Interconnection Plan in electricity and (v) the European Electricity highways. 3 For a detailed list refer to Commission Delegated Regulation (EU) No 1391/2013 of 14 October 2013 on guidelines for trans-European energy infrastructure as regards the Union list of projects of common interest L 349/28 4 In accordance with Regulation 1316/2013, the CEF determines the condition methods and procedures for providing EU Financial assistance to cross-border investments in the energy sector as well as in transport and telecommunication 5 See, for example, Articles 37 of the Electricity Directive and 41 of the Gas Directive 6 For example, the CBCA relating to PCI 8.5 Interconnection Poland/Lithuania involved input from TSOs and NRAs of Lithuania, Poland, Finland, Latvia, Norway, Sweden and Germany. The final CBCA was decided by ACER, delaying the procedure by over five months. For details see ACER In-dividual Decision No. 2/2015.

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