Price regulation on a competitive gas market

Setting rates for energy companies is not inconsistent with achieving competition on the energy market, but not all price interventions by regulators are legally permissible.

On 20 April 2010 the European Court of Justice issued a judgment in a case concerning the ability for public agencies to influence prices for natural gas on a liberalised market through “reference prices” (Federutility v Autorità per l’energia elettrica e il gas, Case C-265/08).

The issue is significant for the national gas market, as it demonstrates the bounds within which, for example, the Polish Energy Regulatory Office may set rates for energy companies, which essentially constitute a type of official price. Creating and setting rates involves a balance between the justified commercial interest energy companies have in maximising their profits and the general societal interest in protecting end users and some businesses from unjustified price levels.

Under Art. 23(1) of Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (EU Official Journal L 176 of 15 July 2003), beginning from 1 July 2007 all customers have the right to freely choose their gas supplier, and all gas suppliers also have the right to non-discriminatory access to customers. The applicants in the Federutility case took the view that under the directive, regulators in member states cannot intervene in gas prices for end users, because from 1 July 2007 prices should be governed by competitive market mechanisms.

The ECJ took a different view, holding that Directive 2003/55/EC does not prevent national regulators from influencing price levels for supply of natural gas by setting “reference prices.” There are three conditions for such intervention, however.

Firstly, the intervention must further “a general economic interest consisting in maintaining the price of the supply of natural gas to final consumers at a reasonable level” in light of the member states’ duty to reconcile liberalisation and protection of final consumers.

Secondly, administrative intervention in gas prices must be limited in time and scope. It is permissible only insofar as necessary to achieve the defined objective (protection of final consumers) within the general economic interest. The duration of such measures is limited to the period necessary to achieve such objective.

Thirdly, the rules for administrative regulation of prices must be “clearly defined, transparent, non-discriminatory and verifiable” and guarantee energy companies in the EU equal access to consumers in the given member state.

This means that not all price intervention by regulators is justified or legally permissible. Intervention is legal only if it meets all of the conditions outlined by the court.