Certification and the

third country clause:

Comments on the
DESFA case
Alexia Trokoudi
Head of Legal Department

George Paidakakis
Legal Officer, Oil & Gas Unit
Regulatory Authority for Energy (RAE), Greece
7th FSR & BNetzA Forum on Legal Issues of Energy Regulation
6 February 2015, Berlin
 DESFA’s shareholders structure before the Deal
35,5%
HELLENIC
GREEK STATE
PETROLEUM

DEPA 35%
65%
(Supplier -
VIU)

100%

DESFA
Owner and Operator:
- Transmission System
- LNG Terminal
2
 DESFA’s shareholders structure after the Deal

GREEK STATE SOCAR

34% 66%

DESFA
Owner and Operator:
- Transmission System
- LNG Terminal

3
 The Legal Framework

Directive 73/2009/EC concerning common rules for the internal market in natural
gas

 Article 9: Unbundling of transmission systems and transmission system

operators

 Article 10: Designation and Certification of Transmission System Operators

 Article 11: Certification in relation to third countries

Greek Energy Law 4001/2011 : Article 65 “Certification in relation to third countries”

4
 Article 11: The Legal Test

Certification by the national regulatory authority should be rejected if either:

 (a) the TSO being acquired does not comply with the rules on unbundling, or

 (b) the transaction puts at risk the security of energy supply of the Member
State concerned or of the EU

5
 I. The rules on unbundling

Should be fully respected by both EU and non-EU undertakings

As part of a VIU on 3 September 2009, DESFA was eligible for the ITO model

6
 II. The security of energy supply

Recital 22 of Directive 2009/73 states the rationale:

▪ “The security of energy supply is an essential element of public security and is therefore
inherently connected to the efficient functioning of the internal market in gas”
Q: networks as “strategic assets”?
▪ “The security of supply of energy to the Community requires, in particular, an assessment of
the independence of network operation, the level of the Community’s and individual Member
State’s dependence on energy supply from third countries, and the treatment of both
domestic and foreign trade and investment in energy in a particular third country”
Q: diversification and flexibility?
▪ “Security of supply should therefore be assessed in the light of the factual circumstances of
each case [see above] as well as the rights and obligations arising under international law, in
particular the international agreements between the Community and the third country
concerned”
Q: IGAs as a prerequisite? 7
 II. The security of energy supply

Article 11 (3) (b) of Directive 2009/73 states what should be taken into account:

▪ The rights and obligations of the Community and the Member State with respect to
that third country arising under international law

▪ Other specific facts and circumstances of the case and the third country concerned

8
 II. The security of energy supply

DESFA case attempts to clarify the rule:

1. Networks as “strategic assets”: when is this important for our purposes?

2. The factual circumstances of each case: diversification and flexibility?

3. The rights and obligations arising under international law: IGAs not a pre-requisite!

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 1. Networks as “strategic assets”

The DESFA gas transmission network

can in the future be connected with
other infrastructure important for the
transportation of gas to Greece as well
as other EU Member States:
• the Trans Adriatic Pipeline (TAP)
• the Interconnector Greece Bulgaria
(IGB)

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 1. Networks as “strategic assets”

QUERY I
Is the characterization of a network as a “European Critical Infrastructure” according to
the provisions of Directive 2008/114/EC a pre-requisite for certification under the
third country rule?

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 1. Networks as “strategic assets”

QUERY II
Is even the characterization of a network as “strategic asset” a stand-alone criterion for
certification under the third country rule?

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2. The factual circumstances of each case

SECURITY OF SUPPLY

Diversification of Flexibility of the system

sources

LNG

Storage

Reverse flow
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 2. The factual circumstances of each case

REMEMBER : Recital 22 of Directive 2009/73

▪ the independence of network operation
▪ the level of the Community’s and individual Member State’s dependence on energy
supply from third countries
▪ the treatment of both domestic and foreign trade and investment in energy in a
particular third country

NOT VERY HELPFUL!

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 2. The factual circumstances of each case

RAE’s ARGUMENT #1
The volumes of Azeri gas delivered to Greece and the EU are small, especially in
comparison to Russian volumes

EC’s RESPONSE
▪ The share of Azeri gas in the Greek market today already amounts to ~18%
▪ The position of SOCAR is of significance, particularly in view of its participations in
the Shah Deniz II field and in the TANAP pipeline.
▪ Risk of foreclosure of gas supplies from other sources.
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 2. The factual circumstances of each case

RAE’s ARGUMENT #2
An increase in Azeri gas supplies will actually improve the security of supply situation in
Greece and the wider region given that it will reduce the dependence on gas from a
single source, Russia

EC’s RESPONSE
▪ This assessment is correct but not relevant
▪ Necessary to take into account the strategic position and function of the DESFA
network, which constitutes an entry gate of gas from multiple sources to Greece and
the EU
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 2. The factual circumstances of each case

REMEMBER : Recital 22 of Directive 2009/73

▪ the independence of network operation
▪ the level of the Community’s and individual Member State’s dependence on energy
supply from third countries
▪ the treatment of both domestic and foreign trade and investment in energy in a
particular third country

NOT VERY HELPFUL!

17
 2. The factual circumstances of each case

RAE’s ARGUMENT #3
The independent operation of DESFA is already sufficiently secured by the fact that
DESFA complies with the EU unbundling framework

EC’s RESPONSE
▪ The security of supply assessment in Article 11 is an additional test
▪ There are material differences between a person from a third country controlling a
TSO and a person from an EU Member State controlling a TSO : third countries are
not bound by EU law
▪ Additional measures may thus be required
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 2. The factual circumstances of each case

REMEMBER : Recital 22 of Directive 2009/73

▪ the independence of network operation
▪ the level of the Community’s and individual Member State’s dependence on energy
supply from third countries
▪ the treatment of both domestic and foreign trade and investment in energy in a
particular third country

NOT VERY HELPFUL!

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 3. The rights and obligations arising under
international law

Recital 22 Article 11
The treatment of both The rights and obligations of
domestic and foreign the Community with respect
trade and investment in to that third country arising
energy in a particular third under international law
country

Tip:
Check whether the EU has well
established trade relationships with the
country concerned
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 3. The rights and obligations arising under
international law

IGA
▪ The original Commission proposal for the Directive, endorsed by the Parliament,
provided for a prohibition on investors from third countries to acquire control of EU
transmission networks unless this was authorized under an international
agreement – The negotiation with the Council led to the removal of this general
prohibition.

▪ An IGA with the Republic of Azerbaijan?

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 The EC’s opinion conclusions

The EC’s remaining concerns :

▪ the important position of the DESFA network in the context of the

strategic asset region's security of supply
▪ the fact that [sole] control is carried out by a vertically integrated
factual
state-owned company from a third country that is an important
circumstances supplier of gas to Greece and, on the basis of further planned
investments, to the EU
▪ the fact that the unbundling rules and other regulatory provisions do
International not, by themselves, provide sufficient guarantees in the absence of
law additional safeguards such as an intergovernmental agreement
addressing security of supply 22
 The EC’s opinion conclusions

C O M PA R E
with EC’s opinion in the certification of T I G F (France / 2014):

▪ TIGF network not the largest part of the French gas transmission
strategic asset infrastructure

▪ France has supply routes other than through Spain & GIC (Singapore)
factual has joint control together with Snam, an EU-based ownership
circumstances unbundled TSO
▪ Singapore is not a country that produces natural gas and no
International interconnections to Europe exist & trade relations between
law Singapore and the EU are well established and reciprocal
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 The EC’s opinion conclusions

The EC in DESFA was of the opinion that a d d i t i o n a l s a f e g u a r d s were

n e c e s s a r y to effectively address the abovementioned concerns

RAE to have the power to suspend, on its own initiative or upon request of the
Commission, all voting rights attached to the shares that SOCAR holds in DESFA
should SOCAR and/or the Republic of Azerbaijan take a decision or action that
negatively affects the security of supply of Greece and/or the European Union

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 The EC’s opinion conclusions

The suspension should be t r i g g e r e d b y the following decisions or actions:

1. Governmental acts by the Republic of Azerbaijan or acts by SOCAR and
companies affiliated to them that render it impossible or difficult (such as by
creating legal uncertainty or conflicts of law between Azeri and EU legislation) for
SOCAR or DESFA to comply with EU or Greek energy law, other relevant EU law or
Treaty obligations.
2. The exercise by the Republic of Azerbaijan of its ownership rights in SOCAR
resulting in SOCAR or DESFA acting in a material manner contrary to EU or Greek
energy law, other relevant EU law or Treaty obligations.
3. Acts by the Republic of Azerbaijan, SOCAR and companies affiliated to them that
directly or indirectly sanction the enforcement of EU and Greek law against
SOCAR or DESFA, including by measures regarding the supply of natural gas to
the EU or the terms and conditions of such supplies 25
 The EC’s opinion conclusions

▪ Before suspending the voting rights of SOCAR in DESFA in accordance with the
above, RAE is requested to consult the Commission. SOCAR's procedural rights,
including the right to be heard, should be respected.
▪ The suspension of voting rights should not be lifted before legally binding
measures, including, if required, legally binding measures under international
public law, have entered into force that fully eliminate the risks that have given
rise to the suspension of SOCAR's voting rights.
▪ Furthermore, the Commission takes the view that no later than 3 months after
granting the certification the Member State should grant RAE the right to apply
more stringent measures in case the suspension of SOCAR's voting rights has not
resulted in the elimination of the decision or action by SOCAR and/or the Republic
of Azerbaijan that negatively affect security of supply.
Not very clear…
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 RAE’s final decision

▪ RAE received EC’s opinion on 29 July 2014 – took “outmost respect” of it

▪ Forwarded it to the Ministry of Energy to take note of the suspension of voting
rights condition that at the time did not exist in the Greek Energy Law
▪ New article 65A was added in the Greek Energy Law within the 2 months period
(Official Gazette No. A 194/19.09.2014)

▪ RAE adopted its final decision No. 523/2014 on 25 September 2014 (Official
Gazette No. B 2572/26.09.2014)

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 The Third Country Clause: Criteria

Strategic asset - crucial entry point

Strong energy related interests – important supplier
Nature of control
State-ownership
Well established reciprocal trading relationships

Additional safeguards – possibly not necessary if an IGA is in place

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 Our final thoughts

▪ Challenging case - uncharted waters

▪ Highly political issues run in parallel
▪ Interesting inter-institutional dialogue
▪ Very educating for everyone involved

* The deal is still pending

* The EC (DG COMP) opened in-depth investigation on 05.11.2014
* New government in Greece as of 26.01.2015 – is it important?
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Thank you for your attention

Alexia Trokoudi
trokoudi@rae.gr

George Paidakakis
gpaidakakis@rae.gr

www.rae.gr