Ukraine in the Energy Community: International Obligations in the Natural Gas Sector
Ielyzaveta V. Badanova
Ukraine has been a member of the Energy Community since 1 February 2011. Naturally, this status entails certain benefits as well as responsibilities for the country. This article is centred on Ukraine’s obligations in the natural gas sector which arise out of its membership in the said international organisation.
Energy Community at glance
The Energy Community is a public international law organisation established under the auspices of the European Union in October 2005 for an initial period of 10 years. In October 2013, its mandate was extended for 10 more years to last until October 20261. The Energy Community currently consists of nine Parties (i.e. the EU and eight Contracting Parties, including Ukraine), several observer states (Armenia, Georgia, Turkey, and Norway), and a number of participant states (i.e. EU Member States that expressed their will to participate in the organisation’s deliberations). The Energy Community is set up to further the complex task of legal and economic upgrade of Network Energy sectors in countries of South East Europe and the Black Sea region. Within the organisation’s framework, Network Energy currently includes electricity, natural gas, and oil2.
The Energy Community is set up to further the complex task of legal and economic upgrade of Network Energy sectors in countries of South East Europe and the Black Sea region
According to its constituent treaty, the Energy Community has three activity areas, namely: 1) extension of the EU acquis communautaires on energy, environment, competition, renewables, energy efficiency, and statistics3 to be implemented by non-EU members; 2) establishment of the mechanism for operating Network Energy markets; and 3) creation of a single market in Network Energy.
Within the first area, the Contracting Parties are obliged to implement the selected acts of the EU law as specified in the Treaty establishing the Energy Community and relevant Ministerial Council decisions (described further below). Before making them part of the Energy Community legal framework, the relevant acts undergo adjustment to institutional peculiarities of the organisation and specific circumstances of the Contractings Parties.
The second area encompasses a range of measures relating to the operational functioning of the Network Energy sectors with a specific focus on security of supply. Each Contracting Party is required to submit biennial security of supply statements. The latest recorded statement of Ukraine dates back to January 2012. Activities in the second area also include regulation and standardisation of unilateral safeguard measures allowed in response to certain types of threats. Promotion of high levels of energy supply to consumers (including through measures fostering fair competition), harmonisation of Network Energy market designs and regulation, as well as encouragement of the development of renewables and energy efficiency are also captured under this area of activities.
Under the subheading of single market activities, the Parties are prohibited from applying customs duties (including duties of a fiscal nature), quantitative restrictions, and all measures which have an equivalent effect on the import and export of Network Energy
Under the subheading of single market activities, the Parties (i.e. the EU and the Contracting Parties) are prohibited from applying customs duties (including duties of a fiscal nature), quantitative restrictions, and all measures which have an equivalent effect on the import and export of Network Energy.
In furtherance of the solidarity principle, two important competences are envisaged for the Energy Community bodies. In particular, measures may be taken to regulate Network Energy imports from, and exports to third parties with a view to ensure equivalent access to their markets throughout the Energy Community, which in the context of deepening regional crises highlights its prominent potential as a source of bargaining power. Similarly important is the provision on mutual assistance in the event of disruption affecting one Party and involving another or a third party, under which the Ministerial Council — the principal decision-making body of the Energy Community — is required to meet at the instance of the affected country and may take measures in response to such an occurrence. An ad hoc expert body — the Security of Supply Expert Group — shall, among other tasks, coordinate domestic measures in the event of supply disruption.
Extension of the EU acquis in Ukraine’s natural gas sector
Transposition of the EU law into domestic legislation of non-EU members is an inherently complicated process given the diversity of legal systems and real market structures operating across the Energy Community. Ukraine joined the Energy Community amid ongoing efforts at domestic natural gas market liberalisation, which has yet to be embraced in full.
The following acquis on energy currently applies to the natural gas sectors of the Contracting Parties:
— Directive 2003/55/EC of
26 June 2003 concerning common rules for the internal market in natural gas (which in the EU context is often referred to as the “Second Natural Gas Directive”);
— Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply;
— Regulation (EC) 1775/2005 of 28 September 2005 on conditions for access to the natural gas transmission networks.4
All the above acquis came into effect in relation to Ukraine on 1 January 2012. Under Article 2 of its Accession Protocol, Ukraine undertook to provide eligibility to non-household customers and all customers as of 1 January 2012 and 1 January 2015, respectively.5
In the EU, the Third Energy Package (consisting of two directives and three regulations in the electricity and natural gas sectors) was adopted in September 2009 and became operational as of 3 March 2011.6 In connection with this, the Second Natural Gas Directive as well as Regulation (EC) 1775/2005 ceased to have effect in the EU. Recognising developments in EU law, the Ministerial Council decided to enact equivalent amendments to the Energy Community Treaty within a specified timeline. As a result, the operation of the Second Natural Gas Directive within the Energy Community shall cease on 1 January 2015 (with certain exceptions), and Directive 2009/73/EC of 13 July 2009 (the so-called “Third Natural Gas Directive”) shall come into force for the Contracting Parties, including Ukraine.
Similarly, on 1 January 2015 Regulation 1775/2005 shall be substituted by the more advanced Regulation (EC) 715/2009 of 13 July 2009.
Moreover, in the EU Directive 2004/67/EC was repealed by Regulation (EU) 994/2010 of 20 October 2010, which provides a common framework to identify and assess risks related to security of gas supply in the single market as well as to design relevant prevention and contingency measures with the ultimate goal of ensuring consumer protection. While the former Directive remains operational in the Energy Community, possible implementation of the later Regulation is being currently analysed. An independent consultant’s study commissioned by the Energy Community and released in September 2013 provides findings on the compatibility of Directive 2004/67/EC and Regulation (EU) 994/2010 with the existing systems of the Contracting Parties and demonstrates that Ukraine would need to exert significant organisational efforts to fulfil requirements of the latter act (although Ukraine and Moldova are the only Contracting Parties that meet N-1 criterion for security of supply).7
In the Energy Community context, dispute settlement is effectively a non-compliance procedure where a case may be initiated by a Party, the Secretariat, or the Energy Community Regulatory Board
Applicable in all Network Energy sectors, acquis on competition forms an integral part of Ukraine’s commitments as part of the Energy Community. These rules prohibit horizontal and vertical agreements with the object or effect to prevent, restrict, or distort intra-country competition as well as individual or collective abuse of a dominant position in the market (unless sufficient countervailing efficiencies are produced). Ukraine is also required to enact state aid rules which need to protect competition in the sector against improper governmental interventions.
On 22 April 2014, the Energy Community Secretariat entrusted with monitoring the Parties’ implementation of their obligations under the Energy Community Treaty initiated a case against Ukraine in this area: the Secretariat accuses Ukraine of not putting into place necessary state aid legislation.8
Implementation issues
Assessing each Party’s performance against the assumed commitments is crucial for successful realisation of the underlying mission of the Energy Community. Two procedures can be highlighted in this connection: implementation review and dispute settlement. As mentioned earlier, implementation is monitored by the
Energy Community Secretariat and each year culminates with the adoption of an implementation report summarising each Contracting Party’s progress in the pertinent spheres. The 2013 Implementation Report9 pinpointed some issues relevant to the Ukrainian natural gas sector, in particular: lack of functional unbundling of Ukrainian gas transmission system operator (Ukrtransgaz), discriminatory practices in third-party access to the gas transport system, inadequate level of regulated gas prices in the downstream market, issues with implementation of Regulation (EC) 1775/2005, underdeveloped security of supply regulations, etc. Preparation of the 2014 Implementation Report is under way.
In the Energy Community context, dispute settlement is effectively a non-compliance procedure where a case may be initiated by a Party, the Secretariat, or the Energy Community Regulatory Board. As a result, the Ministerial Council may adopt a decision establishing a breach of the Energy Community law which shall be rectified by the relevant member. Otherwise, the procedure for determining serious and persistent breaches can be resorted to.
In this case, the Ministerial Council shall determine relevant sanctions against the defaulted Party.
Conclusion
Bound by its commitments within the Energy Community, Ukraine is pursuing a series of internal reforms aimed at re-designing the domestic natural gas market and ensuring adequate state regulation of the sector. While more progress in implementing international obligations is required, Ukraine’s membership in the Energy Community is an important driver for the gradual transition to the legal standards of the European Union and a facilitator in smooth integration into the regional supranational entity.
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The views expressed are those of the author and do not necessarily reflect the position of her current employers.
1 Obviously, it can be extended further if the parties feel that more time is needed to achieve the set objectives.
2 While originally the oil sector was not covered, it was added to the organisation’s mandate pursuant to Decision of the Ministerial Council 2008/03/MC-EnC of 1 Decem- ber 2008.
3 Acquis on energy efficiency and statistics was first included in the organisation’s mandate pursuant to Decisions of the Ministerial Council D/2009/05/MC/EnC of 18 December 2009 and D/2012/02/MC-EnC of 19 Octo- ber 2012, respectively.
4 See Energy Community, ’Energy Community acquis’, http://www.energy-community.org/ (last accessed on 5 May 2014).
5 Ukraine effectively failed to respect this obligation by adopting Resolution of the National Commission Regulating the Energy Sector No.305 of 29 March 2012.
6 For more information on the Third Energy Package, see European Commission, ’Single market for gas and electricity’, http://ec.europa.eu/ (last accessed on 5 May 2014).
7 See EIHP, ILF, Study on the Implementation of the Regulation (EU) 994/2010 concerning measures to safeguard security of gas supply in the Energy Community, September 2013, http://www.energy-community.org/ (last accessed on 5 May 2014).
8 Energy Community, ’Secretariat initiates dispute settlement procedure against Ukraine for failure to adopt State aid legislation’, 22 April 2014, http://www.energy-community.org/ (last accessed 5 May 2014).
9 Energy Community Secretariat, Annual Implementation Report, 1 September 2013, http://www.energy-community.org/ (last accessed 5 May 2014).
