3.4 Tasks and conduct of regulatory authorities
The next question is then whether certain norms or rules apply in relation to the specific conduct of regulatory authorities in tariff setting decisions, given the fundamental considerations outlined above. The rules of conduct for regulatory authorities under traditional Norwegian law follow from the general principles of public administrative law, i.e. the requirements in the Public Administration Act and other related legislation, as well as non-statutory law. The energy specific legislation does not set out to any great extent more specific rules of conduct for energy regulatory authorities. The guidelines are rather of a more general nature, such as the resource management provision in Section 1-2 of the Petroleum Act and the third party access provision in Section 4-8. This corresponds to the national approach in the electricity sector, where the guidelines are of a general nature, such as the objects clause in the Energy Act Section 1-2.
The EU gas market legislation, on the other hand, governs the roles, responsibilities and conduct of energy regulatory authorities in more detail. With respect to tariff regulation, Article 41(1)(a) of Gas Directive 2009/73/EC and Article 37(1)(a) of Electricity Directive 2009/72/EC both require that the regulatory authorities be responsible for “fixing or approving, in accordance with transparent criteria, transmission or distribution tariffs or their methodologies”. The tariffs or methodologies must allow the necessary investments in the networks to be carried out in a manner that allows them to ensure the viability of the networks.(1) Article 41(6)(a) of the Gas Directive and Artice 37(6)(a) of the Electricity Directive. Regulatory authorities must also have authority to require transmission and distribution system operators to modify their tariffs or methodologies, in order to ensure that they are proportionate and applied in a non-discriminatory manner.(2) Article 41(10) of the Gas Directive and Article 37(1) of the Electricity Directive.
Gas Regulation No. (EC) 715/2009, Article 13 also includes rules on tariff setting and sets out, inter alia, in paragraph 1 that tariffs:
“[...] shall be transparent, take into account the need for system integrity and its improvement and reflect the actual costs incurred, insofar as such costs correspond to those of an efficient and structurally comparable network operator and are transparent, whilst including an appropriate return on investments, and, where appropriate, taking account of the benchmarking of tariffs by the regulatory authorities. Tariffs, or the methodologies used to calculate them, shall be applied in a non-discriminatory manner”
Electricity Regulation No. (EC) 714/2009 includes similar requirements in Article 14.
It follows from these provisions that the regulatory authority must approve tariffs or tariff methodology in advance and that the tariffs must be transparent and non-discriminatory and allow for an appropriate return on investment. It also follows from the provisions that regulators must have the competence to modify tariffs when necessary to ensure proportionality and non-discrimination. On this basis, an important question which arises is whether any norms apply to the regulatory authorities’ procedures for possible amendment of tariffs.
In case C-274/08, Commission v. Sweden, the European Commission argued that Sweden had acted in breach of its obligations under Electricity Directive 2003/54/EC.(3) [2009] ECR I-10647. Electricity Directive 2003/54/EC Article 23 included requirements which to a large extent correspond to the requirements of Article 37 of Electricity Directive 2009/72/EC and Article 41 of Gas Directive 2009/73/EC. Electricity Directive 2003/54/ EC Article 23(2)(a), reads as follows:
“The regulatory authorities shall be responsible for fixing or approving, prior to their entry into force, at least the methodologies used to calculate or establish the terms and conditions for: [...] connection and access to national networks, including transmission and distribution tariffs. These tariffs, or methodologies, shall allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the viability of the networks”.
The Commission held, inter alia, that Article 23(2)(a) of the Electricity Directive had not been correctly implemented under Swedish law, since the regulatory authority Energimarknadsinspektionen had not been given the task of fixing or approving, at minimum, the methodologies used to calculate electricity tariffs prior to their entry into force. Sweden held that its legislation complied with the Directive, since it contained the tariff methodologies, combined with the possibility for the regulatory authorities to correct the tariffs a posteriori. This system, in Sweden’s view, satisfied the objective of the Electricity Directive.
The Court began by emphasising that the necessary grid investments referred to in the provision “can be expected from economic operators only if those tariffs or methodologies are sufficiently precise and give a satisfactory level of predictability”.(4) Case C- 274/08, para 29.It then pointed to the fact that Swedish legislation did not include any provision concerning prior approval by the regulatory authorities, and that a Member State cannot disregard a directive provision, even if other arrangements put in place by the Member State serve the same purposes.(5) Case C-274/08, paras 30-33. Furthermore, the Court held:
“36. Under recital 15 in the preamble to the Directive, the national regulatory authorities are to fix or approve those tariffs, or at least, the methodologies underlying their calculation. Under recital 18 in the preamble to the Directive, those regulatory authorities must ensure that transmission and distribution tariffs so fixed or approved are nondiscriminatory and reflect the costs actually incurred in the transmission or distribution of electricity.
37. In the light of those recitals, which define the objectives which the Community legislature sought to achieve, there is no reason to interpret Article 23(2)(a) of the Directive in a manner which departs from the wording of that provision. It is apparent from the very wording of that provision that, firstly, the national regulatory authorities are to fix or approve, before their entry into force, at least the methodologies used to calculate or establish the terms and conditions for connection and access to national networks, including transmission and distribution tariffs, and, secondly, that those tariffs or methodologies must allow the necessary investments in the networks to be carried out in a manner allowing these investments to ensure the viability of the networks.
38. Article 23(2)(a) of the Directive thus requires a level of predictability of the abovementioned tariffs sufficient to ensure that the necessary investments in the networks are carried out in a manner allowing these investments to ensure the viability of the electricity transmission and distribution networks.
39. Even if, contrary to the Commission’s submissions, that provision does not require the Member States to lay down a formula including a set of parameters permitting precise and direct calculation of the tariffs, it must be held that the legislative framework referred to by the Kingdom of Sweden contains only general principles and criteria which the network tariffs must meet and therefore does not contain any methodology allowing operators to predict, even approximately, the applicable tariffs.
40. The objective of the Directive can be achieved only by the establishment of precise tariffs or of elements of a methodology of tariff calculation of a level of precision such as to allow economic operators to estimate their cost of access to the transmission and distribution networks.
41. It follows that the Swedish legislative framework does not meet the requirement for predictability of tariffs under the Directive, necessary to allow investments in the networks to be carried out in a manner allowing these investments to ensure the viability of the electricity transmission and distribution networks. In any event, it does not introduce in the domestic law the mechanism for review in advance laid down in Article 23(2)(a) of the Directive. The Swedish legislation does not put into place a system under which tariff proposals are submitted to the regulatory authority before their entry into force.” (emphasis added)
Consequently, the Directives must be interpreted as setting out a requirement for predictability of tariffs. In our view, such requirement must apply both for original tariff setting and for later amendments. This entails that the regulator should also seek to ensure sufficient level of predictability when an amendment of the principles for tariff regulation is being considered.
In the Norwegian electricity sector, Norway is required to implement the provisions in Electricity Directive 2009/72/EC and Electricity Regulation No. (EC) 714/2009 in national legislation, with a resultant effect for the independent national regulatory authority RME. If the principles in the Directive and the Regulation are not implemented correctly in the Energy Act, with appurtenant regulations, and a party incurs a loss due to wrongful implementation, the State may incur liability based on EEA law principles, if the conditions developed under EEA for such liability are fulfilled.(6) See, inter alia, the EFTA Court case E-4/04, Karlsson and Rt. 2005 s. 1365. If the principles are correctly implemented, but the national regulatory authority fails to fulfil those requirements, the State may incur liability on the basis of Section 2-1 of the Tort Act. The setting of income frames in the Norwegian electricity sector may provide one example. The Energy Law Regulation Section 4-4 (b) provides that the regulator NVE shall determine yearly income frames for each licensee, where the income over time shall cover operational and depreciation costs and provide a reasonable return on investment, assuming efficient use and development of the system. Furthermore, the provision sets out that the main principles for the determination of the income frame shall be reviewed at intervals, where each interval shall be no less than 5 years, and the licensee shall be guaranteed a minimum rate of return. If these principles are not observed and a market participant incurs a loss, the question of liability under Section 2-1 of the Tort Act might arise. For the Gassled infrastructure on the Norwegian Continental Shelf, however, the point of departure is different, given that the principles in Gas Directive 2009/73/EC and Gas Regulation No. (EC) 715/2009 may not apply directly to upstream gas pipeline networks. Nonetheless, the underlying objectives of these principles are just as important for the management of the gas pipeline system. This raises the question of whether the fundamental requirements relating to non-discrimination, transparency and predictability are relevant and may be considered a form of industry standard. In the latter case, it could be argued that a failure by a regulatory authority to observe these principles in cases of tariff adjustments may be considered negligence under Section 2-1 of the Tort Act. It is clear, however, that the scope for imposing liability in such cases will be more limited, compared to a similar case in the electricity sector, where directly binding standards of conduct are not fulfilled. Below we will therefore also consider another possible basis for liability, namely the breach of legitimate expectations.