EU General Court rules on scope of network codes

The recent judgment of the EU General Court in the MEKH case [1] provides important clarification of the permitted scope of EU network codes in the energy sector. The General Court held that because Article 8(6) of the Gas Regulation, which was the legal basis for the development of network codes, provided only for the allocation of existing capacity and did not provide for the creation of new capacity, the Commission had no power to include rules on the proposal and approval of incremental capacity in the EU network code on capacity allocation mechanisms in gas transmission systems (NC CAM). The implementation of rules on the creation of incremental capacity for gas interconnection points fell within the competence of Member States alone, and not that of ENTSOG and the Commission. The General Court therefore annulled a decision of the ACER Board of Appeal rejecting an appeal against an ACER decision that applied that part of NC CAM, effectively concluding that ACER had no power to adopt the relevant decision. Although the General Court interpreted the relevant EU internal energy market rules by reference to their context and purpose, it did so surprisingly strictly. The majority of network codes and guidelines are likely to find sufficient basis in the EU Gas and Electricity Regulations. However, applying a similarly strict approach in other appeals might well call into question some terms, conditions and methodologies adopted under a range of EU network codes and guidelines in both the gas and electricity sectors, as well as network codes and guidelines. If so, the result could be a less harmonised approach to EU-wide and cross-border issues.

Background

In 2015, the Austrian, Bulgarian, Hungarian and Romanian gas TSOs engaged in a regional project to bring Black Sea gas to markets. Part of the project involved increased capacity at two interconnection points, one of which was the Hungary-Austria interconnection. The Hungarian and Austrian gas TSOs carried out an assessment of demand for capacity. Demand on the Austrian side was almost twice that on the Hungarian side. Both TSOs submitted their proposals to their respective regulators. The Austrian regulator approved the proposal; the Hungarian regulator, MEKH, rejected it. ACER then informed the NRAs that as they had not reached a decision within 6 months of receiving the proposal, it was competent to adopt a decision, in accordance with Article 8(1) of Regulation 713/2009, the predecessor of Regulation 942/2019, the ACER Regulation.

On 9 April 2019, ACER adopted the HUAT decision, Decision No 05/2019. The Hungarian NRA (MEKH) and gas TSO (FGSZ) appealed. On 6 August 2019, the ACER Board of Appeal rejected the two appeals. MEKH and FGSZ appealed to the General Court. Both appellants initially appealed against both the decision of the ACER BoA and the initial decision of ACER, although FGSZ withdrew its appeal against the ACER decision at the oral hearing before the General Court.

Admissibility of the appeal against the ACER decision

Although FGSZ withdrew its appeal against the initial ACER decision, MEKH did not. The General Court concluded that the issue of admissibility of the appeal against ACER’s decision was governed by Regulation 942/2019, the ACER Regulation, which entered into force shortly before the date of the decision of the Board of Appeal in the case. By virtue of a combination of recital 34 and Article 29 of Regulation 942, where an appeal may be brought against an ACER decision before the ACER BoA, that decision may not be the subject of an appeal to the General Court. An appeal to the General Court may be made only against the decision of the BoA. MEKH’s appeal against the ACER decision was therefore inadmissible.

Merits

MEKH argued that Chapter V of NC CAM was unlawful, because it exceeded the powers conferred on the Commission by the EU Gas Regulation, Regulation 715/2009.

Admissibility

As preliminary point, the General Court rejected an argument by ACER that the plea was inadmissible because it had not been raised before the Board of Appeal. The Court confirmed that pleas that have not been raised before the BoA may not be raised before the General Court. However, the BoA could not have ruled on the admissibility of Chapter V of NC CAM, because only the EU courts are entitled to rule on the lawfulness of acts of general applications such as NC CAM. The General Court rejected ACER’s argument that MEKH was out of time to challenge the validity of NC CAM (because the argument would have succeeded only if a challenge would have been admissible beyond doubt, which was not the case here). The General Court also rejected ACER’s argument that the plea of illegality must also be dismissed because NC CAM was not the legal basis of the decision of the ACER BoA. It held that there was a direct connection between NC CAM and the decision of the BoA, because NC CAM was the source of the rules applied by the ACER BoA.

MEKH argued that Chapter V of NC CAM was unlawful on the grounds that the Gas Regulation did not allow the Commission to adopt a network code providing for a process for the creation of incremental capacity going as far as to require the operator to make the investments necessary for the creation of that incremental capacity. It argued that Chapter V was incompatible with the legal basis of the Gas Regulation, namely Article 114 TFEU. It also argued that Chapter V fell outside the Commission’s powers under the Gas Regulation to adopt network codes.

ACER’s argument that MEKH’s plea was ineffective

ACER raised 3 preliminary arguments to the effect that MEKH’s plea of illegality was ineffective. First it argued that Chapter V did not require TSOs to take investment decisions in order to create incremental capacity. The General Court disagreed. Analysing the relevant provisions of Chapter V, it concluded that if the relevant conditions set out there were met, the TSOs were required to create incremental capacity by making the necessary investments. Moreover both ACER itself and the ACER BoA had interpreted Chapter V in that way. The General Court therefore rejected ACER’s argument.

Second, ACER argued that MEKH’s plea of illegality was ineffective, because the decision of the BoA was based not on Chapter V of NC CAM, but on Article 8(1) of the ACER Regulation. Again, the General Court rejected this argument, because the BoA had applied the rules set out in Chapter V: the lawfulness of its decision was conditional on Chapter V.

Third, ACER argued that although MEKH was challenging only Chapter V, other provisions of NC CAM referred to the creation of incremental capacity. The General Court held that this was irrelevant – the only important question was whether Chapter V, which was the Chapter applied by the BoA, was lawful.

The substance of the appeal

The General Court therefore turned to MEKH’s substantive arguments.

Its first argument was that NC CAM was incompatible with the legal basis of the Gas Regulation, namely Article 114 TFEU, which provides for the adoption of harmonisation measures. MEKH argued that this did not extend to creating a regime involving the adoption of individual decisions addressed to private operators (ie. the TSOs). The General Court rejected this argument. The Treaty gives the legislators a wide discretion as to the choice of harmonisation measures, which are not limited to measures of general application, but can include measures addressed to TSOs, and can impose obligations on TSOs to invest in incremental capacity.

MEKH’s second substantive argument (which ultimately succeeded) was that Chapter V exceeded the powers conferred on the Commission by the Gas Regulation.

The General Court first noted that NC CAM had as its legal bases Articles 6(11) and 7(3) of the Gas Regulation. These provisions, together with Article 8(6) of the Gas Regulation, gave the Commission the power to adopt network codes in place of ENTSOG. The Commission’s power was therefore limited to those areas where ENTSOG could develop codes, namely the areas listed in Article 8(6) of the Gas Regulation. Article 6(11) of the Gas Regulation provides that network codes are “designed to amend non-essential elements of the [Gas Regulation]”. It was therefore necessary to consider whether Chapter V could be linked to the areas envisaged by Article 8(6) and, if so, whether Chapter V could be likened to a non-essential element of the Gas Regulation.

The interpretation of Article 8(6) of the Gas Regulation

The General Court considered Article 8(6) from a literal, contextual and teleological perspective (ie. having regard to its purpose).

First, interpreting Article 8(6) literally, the General Court noted that Article 8(6) provided only for the establishment of network codes relating to the allocation of existing capacity and to the management of congestion on the basis of existing capacity, not the allocation of new or incremental capacity or congestion management by means of the creation of new capacity. The Gas Regulation made no reference to future capacity.

Second, interpreting Article 8(6) contextually, the General Court considered whether it followed from the general scheme of the Gas Regulation, or from other provisions of EU law, that the competence conferred on ENTSOG and the Commission extended to the development of rules on the creation of incremental capacity. The General Court concluded that it did not. The Gas Regulation made a clear distinction between the areas listed in Article 8(6) for which ENTSOG was competent to develop network codes, and the framework for the development of incremental capacity, for which ENTSO had a purely advisory role. First, while ENTSOG is responsible for preparing an EU network development plan, the plan is non-binding, and ENTSOG has no power to compel implementation of the plan. Network development therefore falls within the competence of the Member States, and it would be contrary to the logic of the Gas Regulation to interpret it as conferring on ENTSOG the competence to draw up rules on the creation of incremental capacity. Second, Article 16 of the Gas Regulation sets out specific rules for capacity allocation and congestion management, but provides exclusively for the allocation of existing capacity, not for the development of new capacity, and makes no provision for subsequent regulatory treatment. The only provisions capable of imposing an obligation on the part of TSOs to develop new capacity are those set out in the Gas Directive 2009/73, but this is an obligation imposed specifically on each TSO, subject to monitoring by the national regulators. The Gas Directive made no provision for the adoption of an EU regulatory framework for the development of new capacity. The Directive provided for cooperation between NRAs, but again this did not form the basis for EU rules on the creation of incremental capacity. The General Court therefore concluded that when adopting the third energy package, the legislator intended that rules on network development and the creation of incremental capacity should fall within the competence of the Member States, rather than that of ENTSOG and the Commission.

Third, interpreting Article 8(6) teleologically, the General Court concluded that while the EU legislators could have provided for the creation of incremental capacity, there was nothing to suggest that they intended to empower ENTSOG and the Commission to develop a network code to do so. On the contrary, it was clear that the legislators intended to give competence in that area to the Member States alone. In fact the EU Council specifically disregarded proposals to give ENTSOG a greater role and to include a procedure similar to the procedure set out in Chapter V of NC CAM that would have required the TSOs to create incremental capacity. It therefore concluded that Article 8(6) did not confer a power on ENTSOG to include in NC CAM an obligation for TSOs to create incremental capacity, and that the Commission therefore had no power to adopt provisions to do so either.

A “non-essential element”?

Finally, the General Court considered whether the Commission had the power to adopt Chapter V of NC CAM as corresponding to “non-essential” elements of the Gas Regulation. It concluded that it did not. Chapter V had the effect of extending the Commission’s power to adopt rules on capacity allocation and congestion management, to apply to new capacity. As explained above, the legislators had chosen to confer that power on the Member States. The amendment therefore involved a political choice and therefore concerned an essential element of the Gas Regulation, so the Commission had no power to adopt Chapter V. The General Court therefore declared Chapter V inapplicable and annulled the decision of the BoA.

Comment

The General Court concluded that a literal, contextual and teleological interpretation of the Gas Regulation indicated that there was no foundation for the inclusion of Chapter V in NC CAM, and therefore that, in essence, an ACER decision applying that Chapter was unlawful. While the judgment is specific to one provision of one network code, it is clear that it has wider implications, for both gas and electricity. In the electricity sector, analysis of the wider implications is slightly complicated by the fact that Regulation 714/2009, the electricity counterpart of the Gas Regulation that was the subject of the MEKH judgment, has now been superseded by the 2019 recast Electricity Regulation, Regulation 2019/943. The recast Electricity Regulation adopts broadly the same approach as the 2009 version, in empowering ENTSOG, ENTSO-E and the Commission to propose and adopt network codes and guidance, although any future appeal will also need to take into account the later rules on the Commission’s powers to adopt delegated and implementing acts. In future appeals seeking to use similar arguments, it is likely that most provisions of the network codes and of the decisions adopted under them will be found to have sufficient basis in the Gas Regulation or the Electricity Regulation. However, this judgment will prompt a closer scrutiny of the legal basis for contentious provisions of the network codes – if not set out literally in the Gas or Electricity Regulation, can or should a legal basis be implied into the legislation by an analysis of its context or purpose? Of course, a stricter reading of the Gas and Electricity Regulations will inevitably reduce the effectiveness of the EU-wide energy market harmonisation and liberalisation initiative, so it is possible that if the approach followed here is repeated, the EU legislators will feel the need to revise the legislation in order to extend the Commission’s powers. It should also be noted that similar challenges are likely to be slow to emerge, because in most cases it will be necessary to appeal to the ACER BoA first, before a further appeal to the General Court which alone has the power to rule that a measure of general application (in this case a Commission Regulation adopting a network code) is unlawful.

[1] Joined cases T-684/19 and T-704/19 MEKH v. ACER and FGSZ v. ACER, judgment of 16 March 2022, ECLI:EU:T:2022:138