Austria: A liberalised and regulated field

Author: | Published: 1 Oct 2008
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These days, investment in the energy sector involves more than the basics of project financing such as the creditworthiness of involved investors, securing long-term cash flow, guarantees of shareholders, securing a lien or other types of security on the investment itself.

Energy project financing requires – at least in Europe – the accurate knowledge of the limits, constraints and pitfalls set by the European energy liberalisation process, combined with European competition law.

This applies mainly to infrastructure projects such as the construction or enhancement of electricity lines, gas pipelines, storage facilities for gas and Liquid Natural Gas (LNG) terminals. As essential facilities, these installations are regulated. The basic principles are laid down in two EC directives from 2003. These directives, and their corresponding transcription into the law of each member state, provide for compulsory third party access to these installations and the obligation to non-discriminatory behaviour, including the equal treatment of affiliates with third parties. In most cases, newly installed regulatory authorities have (as well as a general right of supervision) under specific circumstances the possibility or even the obligation to control or set the tariffs to be charged by the respective operator of such installation. These tariffs have to be cost-based and should take into account the risks of the project.

The overall aim of this regulation and the task of the regulatory authorities is to provide an environment that enables the development of a fully functioning market with equal, fair and easy access to such essential facilities for any interested third party, especially competing traders, suppliers and end consumers of energy.

In order to ensure the unbiased approach of the respective operator, the directives provide for the obligation of legal unbundling of transmission system operators (TSO) and large distribution system operators (DSO). Thus, the formerly fully integrated companies were forced to demerge the grid operations from the rest of the companies' activities, especially the trading and production of energy. Until now, ownership unbundling has not been necessary under the directives. However, some member states had already enforced the separation in terms of ownership of the grid operations from trading and production activities. Therefore, special purpose companies were created.

The production of electricity or hydrocarbons, as well as the trading of energy, is not regulated. Nevertheless, investments in these sectors have also to take into account this new legal environment. In particular, investors in new power generation facilities have to be aware that an enhancement of the electricity grid or of the pipeline system (in the case of natural gas-fired thermal power stations) are no longer subject only to a decision of the same perhaps vertically integrated company or subject to bilateral negotiations between a potential transport customer (shipper) and a pipeline company on the terms and conditions of a long-term contract ensuring the investment in new transportation capacities, but that any such investment in the regulated grid or pipeline network has to be approved by the regulatory authorities and will be strongly influenced by the concrete methods of tariff calculation applied by the regulatory authority.

The European energy infrastructure has to cope with many different new challenges. The existing grid (electricity and gas) was not built to satisfy the requirements of electricity and gas transportation in a liberalised market, where more and more interconnector capacities are needed and energy flows are subject to market developments and opportunities and no longer follow long-term supply contracts with energy flows predictable well in advance.

Due to discussions on liberalisation and the unbundling issue and in particular the uncertainty about future tariff-setting principles, many investments in new infrastructure projects were stalled.

This was done despite the fact that energy consumption in Europe is still growing and, as far as natural gas is concerned, reserves within Europe are reduced (in particular in the UK) and the dependence upon supply from outside Europe increases.

In this situation, much investment in energy infrastructure, as well as in electricity production, is needed. Project financing is one way to realise such ambitious projects.

Project financing is the financing of a project in which the lenders look principally to the cash flow generated by the operation of the project for the source of funds from which the loans will be repaid. Investors therefore have to look to the creditworthiness and the merits of a project rather than to the project sponsors. Few projects, however, are financed purely on a non-recourse basis, because lenders will inevitably require some support from project sponsors. The degree of involvement of the sponsors depends largely on the security of the cash flow to be generated.

The most common way to ensure such stable income and cash flow is to have sponsors or interested parties commit to certain off-take obligations, thus indirectly guaranteeing that the project will generate sufficient cash flow to meet its debt service requirements.

Investments in energy normally take many years to pay out. Therefore the revenue stream also has to be secured for a long time period (amortisation period).

Before the liberalisation of the energy sector, investors and lenders alike looked for the conclusion of long-term contracts with reliable contract partners who were obligated to pay a certain fixed tariff on a "take or pay", "ship or pay" or "store and pay" basis, which covered the fixed costs and also ensured a reliable cash flow to guarantee earnings to cover repayment of debts and interest payments, as well as dividends.

Under the legal framework established under the new rules governing the energy sector, this kind of security is difficult but not impossible to achieve.

The Austrian legal framework

In 2001 (Electricity) and 2002 (Gas), Austria introduced full market opening and third party access to the national electricity and gas grid, taking into account the then-known status of the draft directives.

Any discrepancies between the Austrian legislation and the directives 2003/54 and 55/EC were corrected by amending the respective Austrian legislation in 2006, taking into account regulation (EC) 1228/2003 on network access conditions for cross-border electricity trade and regulation (EC) 1775/2003 on the conditions for access to gas transmission networks.

As far as power generation from renewable energy sources is concerned, Austria's legislation provides a system whereby certain power generation projects that use renewable primary energy sources are guaranteed for a certain period after start-up of the installation and subsidised feed-in tariffs for the electricity produced for a fixed period (largely for 13 years), dependent on the used primary energy source. The provisions regulating the detailed tariffs and terms and conditions, as well as the various eligible power generation installations, are amended almost twice a year, taking into account the ability to finance these subsidies and the continuing discussion on the promotion of different renewable energy sources, in particular biomass or water power.

The latest amendments were passed in the national assembly in July 2008. The aim of this legislation is to further increase the share of renewable sources of energy in Austria. Also in July 2008, a new law was enacted regulating the subsidisation of certain cogeneration plants and, under a separate law, the subsidisation of certain district heating lines was introduced.

Restrictions due to competition law

Energy supply is often based on exclusive long-term purchasing and supplier relationships. Classic exclusivity arrangements are non-compete obligations, requiring the buyer to purchase practically all its requirements from a particular supplier.

The Vertical Block Exemption Regulation treats direct and indirect obligations of a buyer to purchase more than 80% of its total requirements of the contract goods or services in question as a non-compete obligation. Foreclosure of new competition and the strengthening of pre-existing collective market power are the two significant competition concerns of non-compete obligations. The exclusive relationship must have a significant duration to cause an appreciable foreclosure effect. Short-term exclusivity obligations are normally not likely to exclude competition.

For the European Commission, short-term means in general and across all industries one year.

The Vertical Block Exemption Regulation presumes the legality of non-compete obligations if they are imposed by a supplier with a market share not exceeding the limit of 30% and if the duration of non-compete obligation does not exceed five years. Energy contracts with a longer duration, an indefinite duration or providing for tacit renewals beyond a period of five years are not covered by the safe harbour.

When examining whether the economic benefits of a non-compete obligation compensate for its anti-competitive effects, the following aspects are relevant (efficiency defence).

  • Does the non-compete obligation contribute to ameliorating the production or distribution of energy products or help to bring forward technical or economic progress?
  • Do consumers get a fair rate of the economic benefits resulting from the non-compete obligation?
  • Does the non-compete obligation strengthen the possibility of excluding competition in respect of a considerable part of the energy products in question?
  • Is the non-compete obligation indispensable to the obtaining of the efficiency profits?

One of the efficiency defences most likely to be accepted is when the non-compete obligation is indispensable to justify investments by the energy provider or energy buyer. It has to be shown that the investment is relationship-specific, asymmetric and can only recoup within the time period for which the non-compete clause applies. The European Commission states in its guidelines that most investments do not require exclusivity for more than five years. Only high relationship-specific investments are able to justify long-term exclusivity. Non-compete obligations thus need to be on the basis of exact and verifiable calculations in direct connection with specific investments in order to show the beneficial effect for the duration of the non-compete obligation. The construction of new power plants, for example, might be used as an argument to justify long-term non-compete obligations. In this context, exceptionally, the European Commission tolerates contracts of around 15 years.

The legal consequences of an infringement of EC competition law are nullity of the contract, the imposition of fines and compensation for damages.

Third party access rules for energy infrastructure

Access to the natural gas transportation systems is dealt with differently in the case of access for domestic consumption or transportation to and from the storage and production sites (domestic transportation) as compared with access for cross-border transportation. Both access regimes are organised as regulated third-party access. Access to cross-border transportation is organised by OMV Gas GmbH as a one-stop-shop if more than one transmission system operator is involved. Access to the domestic grid is organised by the local distribution system operator in the case of access for endconsumers and changes of supplier together with the independent system operator and for other transportation by the independent system operator.

Tariffs for domestic transportation are determined by the regulatory authority (ECK) and are paid fully by the endconsumer (exit fee). With regard to cross-border transportation, TSOs have to apply for approval of their methods of tariff calculation and have to publish tariffs calculated in accordance with the methods approved by the regulatory authority (the Energy Control Commission).

Storage entities have to provide non-discriminatory negotiated third-party access to gas storage on the basis of published general terms and conditions.

Tariffs for the use of the Austrian network for domestic consumption are set by the ECK in an ordinance, the Gassystemnutzungstarifverordnung (GSNT).

Section 23a (2) GWG (Austrian Gas Act) provides that tariffs have to be computed with a focus on costs and will comply with the principles of causation. The revenues obtained from the grid provision charge will be considered in computing the grid utilisation rate. It will be permissible to calculate the prices using an average based on the cost of a rationally managed comparable enterprise. In addition, pricing may be based on objectives focussing on the savings potential of enterprises (productivity discounts). The rate structure underlying the prices will be made uniform and will enable a comparison between all system operators offering equivalent services.

These provisions enable the Austrian Regulatory Authority to set a tariff for domestic transportation that is not sufficient to cover all costs incurred within a specific period.

Similar regulations are in place for the electricity grid tariff.

There is very little room for individual agreements between the DSO and its customers. The GSNT is renewed regularly by the ECK. Until 2007, this has been done nearly every year. As of 2008, there exists an informal agreement between the network operators and the Austrian Regulatory Authority that tariffs are set yearly but on the basis of a fixed formula, where the costs of the network operator are only calculated and checked by the regulatory authority every four years and the rate of return granted by the regulatory authority is fixed on a sliding scale for this period. Any cost saving generated by the network operator above the anticipated amount stays with the network operator. In a case where the income deriving from the regulated tariff no longer covers the costs of a DSO, the DSO can apply for a change of the GSNT. (This applies also to any TSO.) This might happen if, for example, the network operator incurs significant costs due to new investments.

Under the network access provisions for domestic third party access, network access agreements (transportation contracts) are concluded for an indefinite time period, allowing for termination with one month's prior notice.

The methods for tariff calculation for the cross-border transportation of gas have to comply with the specifications laid down in Section 31h (1) of the Austrian Gas Act.

In accordance with Section 31h (1) of the Austrian Gas Act, TSOs are obliged to grant system users access on the basis of grid utilisation charges that comply with the principle of non-discrimination and cost-orientation. The methods for the calculation of tariffs are subject to the prior approval of the Austrian Regulatory Authority and will refer to the cost base, consisting of the full costs for operation, fuel gas, line pack management, maintenance, extension, administration and marketing. The return on investment (ROI) to be foreseen will be adequate compared to international ROIs and suitable for the long-term capital structure of the transmission undertaking or holder of the transport rights and will make provision for reasonable risk.

Underlying the tariffs will be the capacity utilisation at the time of calculation.

The methods may provide that grid utilisation charges be determined in part or, in specific cases, also by market-orientated methods such as auctions. The methods will facilitate the efficient trade in gas and competition and avoid cross-subsidies between system users. At the same time they will provide incentives for investment and for maintaining or establishing interoperability. Further, methods will be designed so that necessary investments in the systems can be made so that the system's viability is ensured.

This reads as being more favourable to the investor than the provisions regulating the domestic tariff-setting principles. In practice, however, the regulatory authority tends to apply the same standards for domestic and cross-border transportation. In addition, in accordance with Section 31h (2) of the Austrian Gas Act, the Austrian Regulatory Authority can ask for changes to the authorised methods at any time. This leads to a high level of uncertainty for the network operator and any investor in or sponsor of a project.

For storage projects, the regulatory authority is only allowed to determine which costs may be taken into account in calculating the storage tariffs if the published storage service tariff level is 20% higher than the average tariffs for comparable services in the European Union.

The duration of transportation contracts to be concluded for cross-border transports or storage service contracts can be determined without any specific restriction other than general principles of competition law (see above).

There is no regulation for LNG terminals in place in Austria because Austria has no direct connection to a possible LNG terminal location.

How can we secure long-term, stable cash flow?

Exemptions from standard third party access

Article 22 of directive 2003/55/EC (gas) was transformed into Austrian national law as Section 20 a) of the Austrian Gas Act. Article 7 of EC Regulation 1228/2003/EC (electricity) is directly applicable.

Under these regulations, large new infrastructures, meaning cross-border transmission lines in both gas and electricity (interconnectors) and storage facilities may, upon application, be exempted from certain provisions governing third party access and tariff setting for a certain period of time and subject to certain conditions. Any exemption may only be granted if:

  • the investment in the large new infrastructure concerned will improve competition in gas/electricity supply and security of supply;
  • the risk associated with the investment is so high that the investment in the large new infrastructure would not be made if no exception were granted;
  • the infrastructure is owned by a natural or legal person that is separate, at least in its legal form, from the system operators in whose systems the infrastructure is built;
  • a charge for system use or storage is levied from the users of this large new infrastructure;
  • the exemption above negatively affects neither competition nor the effective functioning of the single market in natural gas/electricity; or
  • contracts in connection with the large new infrastructure are consistent with the competition regulations.

Usually, exemptions granted under these provisions provide for an exemption of up to 50% to 80% of the total capacity from obligatory third party access, enabling the investors to use this capacity for their own business purposes and from the application of the general tariff-setting provisions for the same period.

The exemption is usually granted for the payback period for the initial investment (15 to 25 years). Such applications for exemption have to be filed and granted before the final investment decision is taken. The procedure with the Austrian Regulatory Authority takes about half a year, but only if all preparatory work (documentation and, if appropriate, external expertise on the competition aspects and financing risks of the project).

The European Commission may take up to three months to review and alter any decision taken by the national regulatory authority.

As far as the assessment of the risk of the projects and the projected demand is concerned, regulatory authorities often demand to organise a separate market review, including an open-season procedure for allocation of possible future capacities created by the investment.

This adds to the normal lead time of energy projects and must be considered.

The procedure is lengthy and complicated and the outcome and extent of exemption is subject to an evaluation of the national regulatory authority and the European Commission and is not predictable, but it is the only chance to legally secure the application of fixed tariffs for the payback period and a stable contractual environment for the project, thus guaranteeing a stable cash flow. Otherwise, under the current legal framework, the regulatory authorities may alter the financially sensitive cornerstones of a project due to regulatory requirements at any time.

Author biography

Dr Thomas Starlinger

Fiebinger, Polak, Leon & Partner

Dr Thomas Starlinger was born in 1960 in Vienna and was awarded his JD at the University of Vienna in 1982. He joined Fiebinger, Polak, Leon & Partner in 2007. His practice areas include energy, oil and gas, administrative, general contract and corporate law.

Thomas has been active in the Administrative Court (1983 to1984), was Procurator Fiscal (1984 to1986), in-house counsel for OMV AG (1986 to 2001), the head of the legal department of OMV Erdgas GmbH (2001 to 2002), CEO of AGGM Austrian Gas Grid Management AG (2003 to 2007) and the head of the legal committee of the Association of Gas and District Heating Supply Companies (2004 to 2007).

Thomas is the author of numerous publications in the area of energy law and speaks German and English.