Electricity Interconnectors: Use of revenues issue resolved 

On 11 March, the European Court of Justice (the “ECJ”) delivered its judgment on the request by the Administrative Court of Sweden for a preliminary ruling on the interpretation and validity of Article 16(6) of Regulation (EC) No 714/2009 (the “2009 Regulation”). The request arose in the context of proceedings between Baltic Cable AB and the Swedish energy regulator concerning the use of revenues resulting from the allocation of capacity on the cross-border cable connecting the Swedish and German transmission networks (the “Baltic Cable”).

The case is interesting because it clarifies how Article 16(6) of the 2009 Regulation (otherwise known as the “use of revenues” requirement) should be applied to an interconnector that is not part of a wider transmission network – which is not a scenario that the legislators appear to have contemplated in the drafting. Such interconnectors are likely to find the judgment helpful.

It is worth noting that the 2009 Regulation has now been superseded as a result of the Clean Energy Package, but a similar use of revenues requirement remains in the recast regulation.

The Use of Revenues Requirement

Article 16(6) of the 2009 Regulation comprises three sub-paragraphs broadly as follows:

Revenues resulting from the allocation of interconnection (i.e. congestion revenues) must be used for the following purposes:

1. guaranteeing the actual availability of the allocated capacity; and/or
2. maintaining or increasing interconnection capacities through network investments, in particular in new interconnectors.

If the revenues cannot be efficiently used for those purposes, they may be used, subject to approval by the regulatory authorities of the Member States concerned, up to a maximum amount to be decided by those regulatory authorities, as income to be taken into account by the regulatory authorities when approving the methodology for calculating network tariffs and/or fixing network tariffs.

Any remaining revenues must be placed on a separate internal account line until such time as they can be spent on the prescribed purposes.

Background to the Dispute

The dispute between Baltic Cable AB and the Swedish energy regulator arose from a decision of the latter to require the former to place its congestion revenues on a separate internal account line until such time as the company could use the revenues for one of the prescribed purposes. The company was not part of a wider transmission network and was not supported by tariff-paying customers and therefore it did not have the option of taking the congestion revenues into account when calculating network tariffs.

As congestion revenues constituted the main source of revenue for the company, the decision of the Swedish regulator had serious implications and effectively prevented the company from funding its operation and maintenance costs in relation to the cable or from earning a return on its investment in the cable. Unsurprisingly, the company contested the regulator’s decision. In the course of these proceedings, the Swedish Administrative Court decided to refer a number of questions to the ECJ for a preliminary ruling, taking the view that the dispute raised questions of interpretation and validity of European law.

ECJ’s Judgment

The five questions referred to the ECJ were whether (i) Article 16(6) applies only to Transmission System Operators (“TSOs”); (ii) an undertaking which merely operates an interconnector is a TSO; (iii) operation and maintenance costs of an interconnector can be regarded as network investments to maintain or increase transmission capacities for the purposes of Article 16(6); (iv) an undertaking which merely operates an interconnector can use revenues to make a return or to operate and maintain the interconnector; and (v) the application of Article 16(6) to an undertaking which merely operates an interconnector is contrary to the EU-law principle of proportionality or any other applicable principle.

The ECJ’s decision was as follows:

1. Article 16(6) did concern only TSOs.
2. Undertakings merely operating an interconnector, such as Baltic Cable AB, were TSOs.
3. The operation and maintenance costs of the interconnector concerned cannot be regarded as network investments to maintain or increase interconnection capacities within the meaning of paragraph (b) of Article 16(6).
4. National regulatory authorities must, when they apply the second sub-paragraph of Article 16(6), put the TSO in a position in which it is able to carry out its activity in financially acceptable conditions, corresponding to the conditions of the electricity transmission market, which includes making an appropriate profit, in order, in particular, to prevent it being discriminated against by comparison with the other TSOs concerned.If necessary for those purposes, it is for that authority to authorise that TSO, by way of derogation from the first sub-paragraph of Article 16(6), to use part of the congestion revenues it receives in order to cover the maintenance and operating costs of the interconnector and to make an appropriate profit.
5. It was not necessary to answer the fifth question because it was apparent that the referring court asked the question only in the event that the answer to the previous questions meant that a TSO that merely operated an interconnector may not use its congestion revenues to cover its operation and maintenance costs and/or to make a return.

Comment

The judgment is helpful in clarifying that TSOs that merely operate an interconnector must be entitled to carry out their activities in financially acceptable conditions, including making a return, and if necessary the national regulatory authority must authorise this by way of a derogation.

It is also important to note that the 2009 Regulation has now been superseded by EU Regulation 2019/943 (the “2019 Regulation”). The language used in Article 19 of the 2019 Regulation differs slightly from the language used in Article 16(6) and there appears to be scope to argue that the reformulated language would in any event allow revenues to be used to cover costs relating to the interconnector in question (whether relating to operation and maintenance costs or the cost of providing a return). There is also a new provision that sub-paragraph 1 is subject to a methodology approved by ACER and we would expect ACER’s guidance (due by early 2021) to take into account the ECJ’s decision in this case that undertakings merely operating an interconnector must be able to operate under financially acceptable conditions.

Finally, whilst the 2019 Regulation will be part of “retained law” following the end of the Brexit transition period, it remains to be seen how the UK Government will amend its ongoing application (for example, to remove the role of ACER).