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public service obligations: how to realize their potential in the european energy industry

Public Service Obligations: How to Realize Their Potential in the European Energy Industry
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Knops, H.P.A.; P.J. Slot; K. Wilkeshuis and H.M. de Jong: Public Service Obligations: How to Realize Their Potential in the European Energy Industry, pp. 1-12. In: Proceedings of the 29th IAEE Annual International Energy Conference 2006: 'Securing Energy in Insecure Times', 7-10 June (2006). At: Potsdam, Germany. Eds.: Erdmann, G. and U. Hansen. International Proceeding (refereed)

Hanneke de Jong
Hamilcar Knops

The liberalisation of the European electricity and gas industries has not only required a complete
restructuring of the industries, but has also necessitated the development of new approaches for securing the public policy goals for electricity and gas supply. Whereas before liberalisation government could implement its policy goals rather directly by imposing them upon the vertically integrated ‘monopolist’ utility, in the current situation government needs instruments which allow the achievement of the policy objectives concerned within a market environment.
For this purpose, the concept of a public service obligation (PSO) may be a very useful instrument in the market context (Knops and Hakvoort 2002). PSOs have been labelled ‘a key element’ (EC 2001a) and ‘one of the pillars of the European model of society’ (EC 2004a). Essentially, the concept of a PSO provides, pursuant to Article 86(2) of the EC Treaty, an opportunity to derogate from the strict European rules on free trade and competition in so far as such a derogation is necessary for the effective fulfilment of a service of general economic interest. Therefore, in the liberalised electricity and gas industries, PSOs can play an important role to secure policy goals in the competitive parts of the industries. For example, in the electricity generation market PSOs can be used to secure security of supply or to promote the production of electricity from renewable sources; or in the energy supply markets to protect the customers (e.g. through a ‘supplier of last resort’).
PSOs have attracted growing attention in the last years, also in the energy industries (e.g. Devroe 2000, IE&P 2000, IEA 2002, Hammer 2002, Knops and Hakvoort 2002, and EC 1996, EC 2001a, EC 2003a, and EC 2004a). Initially, not all relevant issues concerning PSOs were clear. However, in recent years, the (European) legal regime for PSOs has been clarified in case law of the European Court of Justice (ECJ), and documents as well as decisions from the European Commission. This clarification concerns in particular the relation between (compensation for) PSOs and the rules on state aid. This particular issue is an illustration of the more general tension between allowing Member States room to impose PSOs, on the one hand, and, on the other hand, the need to keep some control at the Community level in order to prevent that Member States can use PSOs to ‘frustrate’ the development of the free market.
The purpose of this paper is to analyse the potential of PSOs as an instrument to implement public policy goals within a market environment in the European electricity and gas industries. First, we will sketch the position of PSOs within the larger problem of the (re)design of the legal organisation of the energy industries: PSOs appear to be a way to reconcile market freedoms and competition, on the one hand, with the effective fulfilment of services of general economic interest, on the other hand (section 2). Second, the general regime for PSOs is studied in more detail and analysed. For the analysis of the (European) legal regime for PSOs, we analyse (European) case law and other ‘European’ decisions and documents (section 3). Third, the rules for state aid are considered as a sort of ‘intermezzo’ (section 4). Based on the analysis of PSOs and state aid, we can, fourth, study the relation of PSOs with the European rules concerning state aid (section 5). Then we can determine the conditions under which the ‘PSO derogation’ may be successfully applied, as well as the criteria
for any (financial) compensation for PSOs. Fifth, the focus will be on the energy industries: for what issues could PSOs there be an option? For this, we will also consider some ‘energy PSO examples’ from practice (section 6). Finally, it can be concluded what potential there is for PSOs as an instrument to implement public policy goals in competitive energy industries, and under what conditions such PSOs may actually be realised (section 7).

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