Interpreting Article 16 of Regulation 714 – The use of interconnector congestion revenue

Background

The Court delivered its judgment in the context of a dispute between Baltic Cable, the owner and operator of the electricity interconnector between Sweden and Germany, and the Swedish energy regulator, the EI.  The EI, in accordance with Article 16(6)[1], asked Baltic Cable to place its congestion revenues in a separate internal account until it could use them to guarantee the actual availability of allocated capacity and/or to maintain or increase interconnection capacity through network investments, in particular in new interconnectors.  Baltic Cable requested permission to use the revenues instead as part of its network tariffs, ie. to pay for the operation and maintenance of the interconnector.  The EI refused the request.  Baltic Cable appealed to the Swedish courts.  It argued that:

• Article 16(6) applies only to TSOs and not to interconnector operators, which are free to use congestion revenue as they see fit; 
• it should be allowed to use its congestion revenue as income to be taken into account in setting the network tariffs; and
• because its congestion revenues amounted to some 70% of its total revenue, the decision by the EI was contrary to its right of ownership, was disproportionate and infringed the principle of legitimate expectation.

Are interconnector operators TSOs?

The Court of Justice first considered whether Article 16(6) applied to an operator of an interconnector. It noted that almost all of the provisions of Article 16 referred expressly to TSOs. Annex I of Regulation 714/2009, which applied to the allocation of capacity on interconnectors, also referred to TSOs. The Court of Justice therefore concluded that Article 16(6) applied only to TSOs. It then turned to the question of whether interconnector operators are TSOs.

The Court then noted that Article 2(1) of Directive 2009/72 defines a TSO as "a natural or legal person responsible for operating, ensuring the maintenance of and, if necessary, developing the transmission system in a given area and, where applicable, its interconnections with other systems". It therefore concluded that the concept of a TSO includes a person responsible for operating and maintaining an interconnector. There was nothing to suggest in the preparatory work for Regulation 1228/2003, the predecessor of Regulation 714, that the EU legislator intended to exclude interconnectors from the scope of Article 16(6). Furthermore excluding this activity from the concept of a TSO would defeat the purpose of Regulation 714.

Definition of network investments

The Court of Justice then turned to the question of whether the costs of operating and maintaining interconnectors could be considered as network investments for the purposes of Article 16(6)(b). The Court noted that the greater the degree of congestion on an interconnector, the higher the congestion revenues for the interconnector operator. This meant that there was no incentive for the interconnector operator to reduce congestion. Therefore the EU legislator intended congestion revenues to be applied towards investment in increasing interconnection capacity or to maintaining it. Congestion income should preferably be assigned to specific projects contributing to relieving the congestion. The costs of operating and maintaining an interconnector, not being investments, did not fall within Article 16(6)(b).

Use of revenue for interconnector operation and maintenance

The Court then considered whether, under Article 16(6), the national regulatory authority may authorise a TSO that only operates an interconnector (and does not operate a transmission system) to use its congestion revenues to maintain or to operate the interconnector.  The Court noted that unlike TSOs that only operate an interconnector, TSOs that operate both an interconnector and a connected transmission system have the option of investing not only in that interconnector and/or in new interconnectors, but also in the transmission network itself. TSOs that also operate transmission systems receive charges for access to the system, which allow them to cover the maintenance and operating costs of the interconnector, and therefore to make a return. 

In contrast, because they do not operate a network, and do not receive network charges, TSOs that only operate an interconnector are unable to use their congestion revenues for the purposes set out in Article 16(6), second subparagraph. Noting that Article 16(1) provides for network congestion problems to be resolved with non-discriminatory solutions, the Court concluded that Article 16(6) required that TSOs merely operating an interconnector should not be subject to discriminatory treatment compared with those which also operate a transmission network.

Article 16(6) must be interpreted in the light of recital 21 of Regulation 714, according to which it is possible to derogate from the rules on the use of congestion revenues if justified by the specific nature of the interconnector concerned. The obligations set out in Article 16(6) can be made more flexible in the event that an interconnector is operated by a TSO different from the TSOs operating the systems that it interconnects. Article 12(a) of Directive 2009/72 provides that each TSO is to carry out its activity "in financially acceptable conditions". However, a TSO that only operates an interconnector cannot use the congestion revenues efficiently for the purposes set out in Article 16(6)(a) and (b), because allocating the entirety of the revenue for those purposes would prevent the TSO from carrying out its activity under financially acceptable conditions, because it would be unable to cover the costs of operation and maintenance of the interconnector and to make a profit.

The national regulatory authority must therefore put the TSO in a position in which it can carry out its activity in financially acceptable conditions in order to prevent it being discriminated against by comparison with the other TSOs. If necessary in order to do so, it must authorise the TSO, by derogation from Article 16(6), first paragraph, to use part of the congestion revenues in order to cover the maintenance and operating costs of the interconnector and to make an appropriate profit.

Comment

The judgment is an important one. The use and allocation of interconnector congestion revenues under Article 16 of Regulation 714 has long been a subject of debate. This judgment resolves two important questions: 

1. whether the operator of an interconnector is a TSO (which has important implications, for example for the question of TSO unbundling); and 
2. the allocation of revenues.  The Court made it clear that there is a greater degree of flexibility as to the allocation of revenues towards operating expenditure than had perhaps previously been thought, and that congestion revenues can, subject to authorisation by the relevant NRA, be used for the operation and maintenance of the interconnector.

This will be welcome news to interconnector operators.  While a number of them enjoy derogations from Article 16(6), express recognition by the Court of Justice that a derogation is more of an entitlement than an exception will provide considerable reassurance.

Finally, Regulation 714 has now been replaced by Regulation 2019/943. Article 19 of Regulation 943 replaces Article 16 of Regulation 714.  While Article 19 includes a number of important new provisions, particularly in relation to minimum available capacity on interconnectors, it retains the same basic approach to the use of congestion revenue as Article 16(6), albeit with some modifications, suggesting that the principles set out in the Baltic Cable judgment continue to apply under the new Regulation.

^{If the revenues cannot be efficiently used for the purposes set out in points  (a) and/or (b) of the first subparagraph, 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.} 

The rest of revenues shall be placed on a separate internal account line until such time as it can be spent on the purposes set out in points  (a) and/or (b) of the first subparagraph. The regulatory authority shall inform the Agency of the approval referred to in the second subparagraph."