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Journal of European Public Policy
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A liberal actor in a realist world? The Commission
and the external dimension of the single market
for energy
Andreas Goldthau & Nick Sitter
To cite this article: Andreas Goldthau & Nick Sitter (2014) A liberal actor in a realist world? The
Commission and the external dimension of the single market for energy, Journal of European
Public Policy, 21:10, 1452-1472, DOI: 10.1080/13501763.2014.912251
To link to this article: http://dx.doi.org/10.1080/13501763.2014.912251
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A liberal actor in a realist world?
The Commission and the external
dimension of the single market
for energy
Andreas Goldthau and Nick Sitter
ABSTRACT This article investigates the European Commission’s external energy
policy through the lens of the regulatory state. It argues that because of the nature of
its institutions, policy tools and resources, the Commission remains a liberal actor
even as the world leaves the benign pro-market environment of the 1990s and
becomes more mercantilist – or ‘realist’. The article tests seven hypotheses related
to two key challenges as perceived by the Commission: building energy markets,
and making them work. It finds that the Commission seeks to project the single
market beyond its jurisdiction to deal with transit infrastructure problems; extend
international regimes to cover energy trade; deal with monopolists such as
Gazprom through classical competition policy; and fix global energy market failures
with clear regulatory state tools. Importantly, however, some actions by the Commission
can be seen as an attempt to counterbalance external actors, or as second-best
efforts to address energy market failures.
KEY WORDS The Commission; energy policy; external relations; regulatory state
It is often said that we live in the age of the regulatory state. Indeed, the European
Union (EU) is regularly held up as the prime example of the ‘regulatory
state’ model because of the nature of its institutions, its policy tools (law and
regulation rather than redistribution and direct intervention in industry) and
its resources (Jordana and Levi-Faur 2005; Lodge 2008; Majone 1994,
1996). This is no accident: the European Economic Community was part
and parcel of a broader Western liberal approach to international political
economy (Lindberg and Scheingold 1970; Milward 1994; Ruggie 1982). The
liberal blueprint that was built into the Treaty of Rome turned out to be very
close to the new West European policy consensus at the end of the 1980s
(McGowan and Wallace 1996). Domestic policy change towards the economic
right in France, Britain and Germany coupled with the collapse of communism
presented the European Community with a window of opportunity to build a
# 2014 Taylor & Francis
Journal of European Public Policy, 2014
Vol. 21, No. 10, 1452–1472, http://dx.doi.org/10.1080/13501763.2014.912251
liberal single European market at home and to project its liberal market model
onto the international scene.
However, by 2000 this window had begun to close. The Washington consensus
became increasingly contested; Putin’s Russia became more assertive (fuelled
by rising oil prices); and China emerged as an alternative politico-economic
model. The central question addressed in this article is: has the EU changed
with the world in the 2000s, or does it remain a liberal actor, committed to
the ‘regulatory state’ agenda both at home and abroad, in the increasingly
realist world?
The question as to what kind of international actor the EU is has been much
debated, in the pages of this journal (Hyde-Price 2006; Manners 2006; Sjursen
2006a, 2006b; Smith 2004) and elsewhere (Bretherton and Vogler 2006; Hill
1996; Hill and Smith 2011; Peters 2014; Soetendorp 1999). The present
article does not concern the nature of the EU as a global actor so much as
the external dimension of the regulatory state. More specifically, the focus
here is on the single market for energy and the Commission’s efforts to
ensure security of supply for two goods on which is it heavily import dependent:
oil and gas. Our investigation centres on the Commission’s exercise of regulatory
policy tools (and not, for example, on the member states’ policy decisions
about the desired energy mix) and on the Commission’s action as a more or
less unified regulatory actor. To be sure, the Commission is as divided as any
executive or regulator, and often even more so. While the Commission’s
internal dynamics warrant investigation in their own right, this article concerns
how its regulatory state identity at home plays out beyond the borders of the
single market.
Energy is a critical case study of the external dimensions of the EU regulatory
state. It is a vital public policy issue in a sector that has undergone rapid geopolitical
change (Noreng 2006). Both the oil and gas sectors offer a strong test of
the EU’s will and capacity to extend its liberal regime beyond its borders.
Markets for molecules are more difficult to build and manage than markets
for shoes, for example, and market failure can have broad implications for
industrial production, human welfare and even military security (Helm 2002;
Yergin 1991). If the EU cannot respond to changes in a sector at the heart of
economic policy and regulation, it can hardly be expected to address other strategic
sectors successfully.
Our point of departure is the observation that recent developments present
serious challenges for the EU. Increasingly assertive producer states, rising
resource nationalism and the ascendance of new consumers undermine the
market-based liberal model of international energy trade from which the EU
benefitted in the early 1990s. China has adopted its own approach to energy,
characterized by mercantilism, national champions and off-market deals
(Downs 2005). Under Putin’s leadership Russia has sought to retain state
control over strategic sectors such as energy (Gaddy and Ickes 2009). The combination
of opaquely governed national oil companies (NOCs) and stateflanked
energy deals has contributed to uncertainty regarding supply and
A. Goldthau & N. Sitter: The Commission’s external energy policy 1453
demand (Downs 2005; Goldthau 2010; Stevens 2008). What is more, the rapid
rise in oil prices from the record low of $9/barrel in 1998 to a high of $147/
barrel in 2008 (BP 2011) marked a sharply increased price volatility and
created high adjustment costs for industry, consumers and society. Finally, a
series of ‘gas disputes’ between Russia and transit country Ukraine highlighted
Europe’s exposure to supply risks stemming from conflict among third parties.
As the EU’s executive and regulator, the Commission’s declared goal therefore is
to ensure ‘secure [ . . . ] and affordable energy’ for its ‘people, industry and
economy’ (European Commission 2010: 2).
The EU could meet these challenges by measures that fit well into the liberal
paradigm in International Relations (IR) theory (centred on open trade), or by
way of more security-oriented or protectionist measures. For the purpose of this
article, we take ‘liberal’ to entail an actor interpreting issues primarily in terms of
trade rather than geopolitics, and employing policy tools designed to build and
maintain open markets. To test this, we elaborate seven hypotheses linked to
building international markets and to making them work in practice.
THE EXTERNAL DIMENSION OF THE EU REGULATORY STATE
The European single market project came to fruition at an extraordinarily
favourable moment, with the West ideologically, politically and economically
victorious in the Cold War. In the energy sector, consumer countries were in
the driver’s seat after the oil price collapse of 1986 and the decline of the Organization
of Petroleum Exporting Countries (OPEC). By the turn of the millennium
these conditions had begun to change, and the EU’s open market policy
came under considerable stress. Both scholars and policy analysts have therefore
called for a stronger, more muscular and more realist external policy on the part
of the EU (Correlje and van der Linde 2006; Smith 2010; Youngs 2009). To
assess the Commission’s response to the changing energy landscape, seven
hypotheses are drawn up based on the presumption that the EU’s regulatory
nature (and liberal norms) shapes the Commission’s strategy for dealing with
the external dimension of the single market in energy. This is not to equate
the regulatory state with neo-liberalism, since the regulatory state may often
amount to a ‘rescue of the welfare state’ (Levi-Faur 2011); it is simply to
assert that the external manifestation of the EU’s regulatory state overlaps
with liberal or open market approaches to international political economy.
Even if EU energy policy does not live up to the regulatory state ideal-type,
this approach allows us to elaborate expectations about the Commission’s external
behaviour qua regulatory state.
To be sure, the EU regulatory state never quite lived up to the ideal-type.
There is a well-documented gap between the ideal-type and energy policy as
actually applied in the EU and across its member states (Andersen and Sitter
2009; Pelkmans 2001). As a case in point, the 1998 directive liberalizing EU
gas markets featured limited and gradual market opening, including for
example derogations over take-or-pay contracts upon decisions by states
1454 Journal of European Public Policy
(European Parliament and the Council 1998). The second and third ‘packages’
in 2003 (requiring that states adopt a regulated access tariff, establish independent
regulators and ensure non-discriminatory third-party access through legal
unbundling of transport from trading services [European Parliament and the
Council 2003]) and 2009 (focusing on ownership unbundling, new regimes
for independent systems/transmissions operators, stronger national regulators
and a new EU regulatory agency [European Parliament and the Council
2009]) closed the gap somewhat, but maintained energy market heterogeneity.
The member states’ parallel authority in this sector was written into the Lisbon
Treaty: ‘[these] measures shall not affect a Member State’s right to determine
the conditions for exploiting its energy resources, its choice between different
energy sources and the general structure of its energy supply’ (European Communities
2007: Art. 194[2]).
Indeed, even the most prominent advocates of the regulatory state thesis
(Majone 1996, 2005) argued that although it was the central characteristic of
the EU, it was not the only one. EU regulation governs the national regulators,
and there are considerable gaps between EU policy and the policies actually
implemented by national authorities (Andersen and Sitter 2006; Hayward
and Wurzel 2012). As Lodge concluded in a cross-country analysis of Europeanization
of the regulatory state: ‘the impact of “Europeanisation” remains
heavily influenced by domestic politics and policy-making’ (Lodge 2002: 63).
The key theme that runs through this literature and shapes the hypotheses
below is the focus is on regulation – remedying market failure by regulatory
policy tools – at the expense of other tasks such as redistribution or direct provision
of public services and other policy tools such as taxing and spending or
public ownership (Levi-Faur 2004; Lodge 2008; Moran 2002). The first set
of hypotheses about the external dimension of the EU regulatory state are
derived from the assumption that its efforts to build open markets at home
are also reflected in an effort to project the single market rules beyond its
borders. In other words, the Commission sees its mandate not merely as building
an open market (‘deepening’), but also as extending its geographical reach
(‘widening’). In the oil and gas sector this could be done by extending the
scope of existing trade regimes that do not cover the energy sector; by building
new regimes for trade in energy (including such sector-specific issues such as
‘upstream’ investment in production and ‘midstream’ transit regimes); and by
establishing rules that guarantee non-discrimination for ‘downstream’ (distribution
and sales) market actors. The principal causal mechanism at work
here is the norms of the EU regulatory state (the Treaty of the European
Union and the Commission’s mandate establish open trade as an objective),
but it is reinforced by the range of policy tools that are available to the Commission
– powerful regulatory tools, but limited financial resources and no power
to directly instruct their NOCs, let alone deploy military force.
Although the regulatory state itself is deeply engrained in the EU’s institutional
‘DNA’, it was only in the early 1990s that the regulatory state approach
could be projected beyond the then 12 member states. The favourable
A. Goldthau & N. Sitter: The Commission’s external energy policy 1455
geopolitical context was the collapse of communism and the ‘unipolar moment’
(Krauthammer 1990). The EU seized the opportunity to establish the European
Economic Area, embark on Eastern enlargement and put in place regimes for
trade with the ‘near abroad’. This was essentially a market-making project: an
effort to extend the single market beyond the EU’s boundaries. However, the
new geopolitical scene proved ephemeral, and the ‘liberal moment’ had
passed by the turn of the millennium. Economic and political power began
to shift away from the Organisation for Economic Co-operation and Development
(OECD) world, and the ‘West’ could no longer (unilaterally) set the rules
of the game (Ikenberry 2008). This leaves three hypotheses to test:
I. First, the more the EU expands its external economic policy into the
energy sector, the more we expect the Commission to seek to extend
rule-based trade regimes to energy in order to secure a level playing
field. Our empirical investigation focuses on EU efforts to foster international
and regional trading regimes, both in terms of membership
and in terms of extending their scope to energy.
II. Second, the stronger the EU’s foray into addressing energy supply risks,
the greater the Commission’s use of general regulatory rules rather than
ad hoc bilateral arrangements. Our empirical investigation focuses on
the Commission’s efforts to extend trade regimes to cover third country
investment and transit, i.e. issue areas that are crucial to the bloc’s longterm
supply of oil and gas.
III. Third, the more the lopsided market power in international energy
relations becomes the focus of the Commission’s actions, the stronger
its push to maintain a level playing field for energy firms regardless of
their national origin, rather than supporting European ‘national champions’.
Our empirical investigation focuses on the extent to which
single market rules affect non-EU firms that operate in Europe, notably
with a view to external monopoly gas suppliers such as Gazprom.
Another four hypotheses follow from the assumption that as a liberal regulatory
state, the Commission can be expected to address problems related to
making markets work in terms of correcting EU-level market failures. In
markets such as oil and gas, the challenges consist of ensuring price transparency
and public data on supply and demand; establishing mechanisms to deal with
supply (gas) or price (oil) shocks; establishing enforceable laws against cartels,
firms’ abuse of their dominant position and restraints on trade (price fixing
or discrimination, restrictions on resale); and supporting crucial infrastructure,
notably pipelines. Our second set of hypotheses are informed by these four
issues: dealing with asymmetric information in energy markets (market data);
managing externalities from non-energy events (notably political shocks to
supply); addressing market dominance (restoring competition); and promoting
the supply of EU-level public goods (infrastructure). The four hypotheses are:
1456 Journal of European Public Policy
IV. Fourth, the more pronounced bilateral arrangements or off-market deals in
international energy affairs, the stronger the EU’s efforts to address
obstacles related to full and openly accessible market information on oil
and gas fundamentals or shift information asymmetry in its own
favour. Our empirical investigation explores the Commission’s efforts
to foster transparency at home and abroad.
V. Fifth, the more exposed EU energy markets are to external economic
shocks (stemming from armed conflict or nationalization or strikes in producer
countries), the more the Commission seeks to manage rather than
prevent them. Our empirical investigation explores the ways the EU
chooses to manage the consequences of political and economic shocks
that threaten energy security.
VI. Sixth, the more the EU shifts its attention to producer cartels and monopolies,
the stronger the Commission’s efforts to foster competition on
international energy markets (i.e. break up cartels rather than counterbalance
them by establishing consumer monopsonies). Our empirical investigation
explores the Commission’s actions related to international and
regional oil and gas markets.
VII. Seventh, to the extent that transnational energy infrastructure issues are
tackled, the Commission addresses them in terms of market imperfections
arising from public goods characteristics related to energy infrastructure
and transit, rather than resorting to ‘pipeline diplomacy’. Our empirical
investigation explores the EU’s involvement in providing infrastructure,
through a range of policy tools that support the establishment and maintenance
of pipelines, interconnectors and energy networks.
The next section presents the findings of the empirical investigation. Because
our investigation centres on the preferences and actions of the Commission, the
empirical data that provide the basis for the following analysis are drawn from
Commission proposals and EU legislation (directives, regulations) as well as
direct action through agreements with third parties, external projects and the
use of competition law. The data set comprise 85 energy-related acts by the Commission
between 1990 and 2012, as reported in Agence Europe, of which about
half have a clear external dimension.1
The latter were checked against reporting
in the specialist press, particularly the Financial Times and European Voice.
BUILDING AND OPERATING INTERNATIONAL OIL AND GAS
MARKETS
Our first set of hypotheses relate to the assumption that the Commission seeks
to build or extend rule-based markets for energy, even as global power structures
shift against the liberal model. The relevant timeline of our investigation therefore
covers both the extension of the single European market to energy in the
1990s and the effort to extend this beyond the EU’s own boundaries, and the
more politicized period that followed in the 2000s.
A. Goldthau & N. Sitter: The Commission’s external energy policy 1457
Table 1 The external dimension of the EU regulatory state: making and operating energy markets (ordered by degree of compliance with liberal
paradigm)
Issue Aim Means Examples of tools as applied Assessment
I 1994 Trade regimes,
regulating trade
Free trade and
efficiency gains
Multilateral and
bilateral
agreements
All SEM energy rules extended to European
Free Trade Association states that joined
European Economic Area
Liberal
2006 Energy Community Treaty extends SEM
energy rules to West Balkans
(subsequently also Ukraine and Moldova)
Liberal
since
1994/
1993
Attempts to extend World Trade
Organization (WTO) rules to energy in
context of Russian and Saudi accession
(failed)
Liberal
1991–
2003
EU provided technical assistance through
Technical Assistance to the
Commonwealth of Independent States to
Commonwealth of Independent States
states; replaced by Neighbourhood
Policy
Liberal
Since
2012
Commission negotiations with Russia and
Belarus on Baltic electricity market
(ongoing); may include infrastructure
funding
Liberal
1998–
2002
SYNERGY programme for co-operation with
Latin America, South-East Asia and
African states on energy policy
Neutral
1458JournalofEuropeanPublicPolicy
II 1994 Regulating
investment and
transit
Sustain upstream
capacity and trade
infrastructure
Multilateral and
bilateral
agreements
For EFTA states: EEA (and bilateral treaties
with Switzerland)
Liberal
2006 For Ukraine, Moldova and West Balkans:
Energy Community
Liberal
1994 For CIS: Energy Charter Treaty (not
operational)
Liberal
since
1999
For CIS: 10 Partnership and Co-operation
Agreements reference to WTO rule plus
provision for dialogue, expert groups
etc.; EU–Russia Energy Dialogue
Neutral
2005,
1997,
1989
For non-CIS: Africa–Europe Energy
Partnership (AEEP), Euro-Mediterranean
Energy Partnership; EU–Gulf Cooperation
Council (GCC) agreement
Neutral
2011 Commission allows exemptions, e.g. for
pipeline projects such as Nord Stream,
see below
Non-liberal
III 1994 Non-EU firms’ access
to the Single
European Market
Competitive SEM,
consumer choice,
efficient price
EU competition
policy and energy
market regulation
For EFTA states: EEA (and bilateral treaties
with Switzerland)
Liberal
2006 For Turkey and West Balkans: Energy
Community
Liberal
2009 For CIS: SEM rules require non-EU gas
companies to register with EU regulator,
permits Commission full use of
competition policy tools also vis-a`-vis
foreign companies active on EU market
(e.g. Gazprom dawn raid, see below)
Liberal
2009 EU ‘Third Energy Package’ gas market
rules require non-EU firms to ‘unbundle’
operation in EU
Liberal
(Continued)
A.Goldthau&N.Sitter:TheCommission’sexternalenergypolicy1459
Table 1 Continued
Issue Aim Means Examples of tools as applied Assessment
2009 EU ‘Third Energy Package’ gas market rules
allow member states to withhold
certification for transmission operators in
case of security of supply risk
Non-liberal
IV 1995,
1999,
2008
Asymmetric
information
Foster transparency
at home and
abroad
Collect and
disseminate data
Regulation on registration for crude oil
imports and deliveries in the Community;
decision on information on crude oil
supply costs and consumer prices;
regulation on energy statistics
Liberal
2012 Decision on transparency in member
states’ bilateral agreements with third
countries
Liberal
Since
2001
Support international transparency:
Eurostat cooperation in Joint Oil Data
Initiative (JODI) with International
Energy Agency (IEA)
Liberal
V 1998,
2002,
2006,
2009
Externalities from
non-energy events
Managing (buffering)
externalities
Reserve stocks, co-
ordination
Directives on oil stocks and to bring EU
rules on stocks in line with IEA provisions
Liberal
2004,
2010
Directive, later Regulation, on common EU
framework for defining security of supply
policies with regard to gas disruptions
Liberal
1996,
2003,
2006
Decisions on trans-European energy
networks, including funding, to achieve
effective SEM operation and security /
diversification of supply
Liberal
1460JournalofEuropeanPublicPolicy
VI 2002 Imperfect
competition,
market dominance
Restore or promote
competition
EU competition
policy
Norwegian gas export monopoly gas
negotiating committee (GFU) dismantled
Liberal
2003,
2005
Removed destination clauses from gas
supply contracts with Gazprom and
others
Liberal
2011–
2012
Investigation of Gazprom practices: ‘dawn
raids’ and anti-trust case
Liberal
2010 Commission vetting bilateral deals
between EU member states and third
parties
Liberal
2009 Commission proposed commercial vehicle
to assume risks and supply guarantees
to the Caspian (Caspian Development
Corporation – on hold)
Non-liberal
2010 Commission helping Poland with
negotiations with Russia
Non-liberal
VII 1996;
1993/
2000
Undersupply of
public goods
Provide or support
infrastructure
SEM exemptions,
funding, support
projects
INOGATE technical assistance programme
& TRACECA to promote alternative
energy infrastructure
Liberal
2013 Call on Member States to bring contracts
on South Stream in line with Third Energy
Package re. unbundling, operation and
tariffs
Liberal
Since
2002
Support alternative pipelines to diversify
supplies (i.e. non-Russian gas from the
Caspian) both financially and through
exemptions from SEM rules: Nabucco
(failed) and ‘Southern Corridor’
Non-liberal
Since
1997
Support alternative pipelines to circumvent
transit countries (Ukraine), both
financially and through exempting from
SEM rules: Nord Stream
Non-liberal
A.Goldthau&N.Sitter:TheCommission’sexternalenergypolicy1461
Table 1 sets out the most important policy challenges, and presents our findings
on the Commission’s response (because we focus on the Commission’s
strategies, the assessment in the last column captures the use of policy tools,
not their effectiveness). A ‘liberal response’ is defined as one that is in line
with the principles of the regulatory state model – and our hypotheses – and
thus constitutes an extension of the EU’s internal regulatory state model to
its external energy environment. ‘Non-liberal’ responses include a wider range
of policy tools, for example measures designed to protect EU markets or
firms, to project EU consumer power vis-a`-vis third parties, or use of political
and economic power to access new markets. Although the line is sometimes
blurred, it is clear that the policy tools as actually applied by the Commission
are by no means restricted to the ‘liberal’ toolbox.
Extending international trade regimes to the energy sector
The principal policy tools by which the Commission pursues a liberal market
agenda in external energy affairs are multilateral and bilateral agreements.
The most successful example is the 1994 European Economic Area (EEA),
which extended the single European market to the EFTA states, notably oiland
gas-rich Norway, making this important supplier country a de facto
member state of the internal market. Norway consequently had to dismantle
the Gas Negotiation Committee (GFU), its monopoly organization for co-ordinating
exports of gas between 1986 and 2002 (Austvik 2001). Since oil and gas
have been left out of the World Trade Organization (WTO), the Commission
has sought to include energy in the WTO framework and to close energy-related
loopholes such as dual pricing for gas (Behn and Pogoretskyy 2012). However,
when the WTO was extended to Russia (2012) and Saudi Arabia (2005), energy
was not included (Milthorp and Christy 2011: 293). The Energy Community
Treaty, which includes Albania, Bosnia, Croatia, Macedonia, Montenegro,
Serbia, Kosovo, the Ukraine and Moldova, is a modest success that commits
the signatories to rule-based energy governance. The Commission has also
started negotiations with Russia and Belarus on a legal framework to operate
the electricity networks of the Baltic member states ‘[i]n line with the agreed
roadmap for full implementation of internal market rules’ (European Commission
2012a). In addition it uses a number of softer policy instruments, including
financial support of non-supply-related programmes in renewable energy and
energy efficiency, the establishment of expert groups to discuss technical
issues, and a wide range of partnership agreements (Association Agreements,
Partnership and Co-operation Agreements, SYNERGY agreements).
The overall finding is that the Commission pushes a liberal agenda that represents
an external extension of its own regulatory state. To the extent that the
EU ventured into regulating the energy sector as part of its external economic
policy, it took a strictly rule-based approach. To be fair, this finding is unsurprising.
The EU’s overall preference for free trade is hard-wired into the organization
through its treaties and fundamental principles as well as member state
1462 Journal of European Public Policy
economic policy preferences (Moravcsik 1998). The expansion of EU external
economic policy to energy since the early 1990s has therefore been very much
shaped by the EU’s overall liberal paradigm. Although there are exceptions to
the EU’s general free trade disposition, energy is no longer among them.
Building regimes for transit and investment
The EU has taken several steps to address risks related to security of supply, particularly
linked to upstream investment and transit. The main policy tools are
international agreements pertaining specifically to the oil and gas sector. The
Commission has sought to establish stable and predictable legal frameworks
and transnational dispute resolution mechanisms. This is based on the conviction
that both gas and petroleum trade require substantial upstream investment
in production capacity and midstream spending on transport infrastructure,
which in turn requires a long time-horizon of involved public or private com-
panies.
A case in point is the Energy Charter Treaty (ECT) of 1991 (Dore and Bauw
1995; Waelde 1995). Although Russia signed the ECT, it declined to ratify the
treaty and stopped the provisional application of the ECT in 2009. The ostensible
reason was the treaty’s bias towards the EU’s interests and Western liberal
principles, and its signing at a time of Russian weakness (Selivanova 2012). As
for Norway (which has also not ratified the ECT), transit and trade with the EU
are covered by the EEA agreement and the Norwegian regulatory regime. In
addition, the 2006 Energy Community Treaty commits the signatories to
implementing the EU gas liberalization legislative packages. This provides the
Commission with a policy tool to influence transit rules outside its own
immediate jurisdiction, not least because of the expertise it shares with nonmember
states and their regulatory authorities. Indeed, this affects the entire
energy sector in these states, not merely transit and investment.
A final example of the EU’s rule-based approach to energy investment and
transit are the numerous Partnership and Co-operation Agreements (PCAs) it
has signed since 1999, which typically include chapters related to energy. The
latter usually make reference to WTO rules and formalize consultation on technical
or regulatory issues. PCAs are often complemented by a series of legally nonbinding
but still institutionalized ‘agreements’ or ‘dialogues’, such as the co-operation
agreement with the Gulf Co-operation Council (GCC) or the EU–Russia
Energy Dialogue. After the 2009 gas crisis between Russia and the Ukraine, the
EU–Russia Energy Dialogue was complemented by an early warning mechanism
aimed at moderating and de-escalating conflict surrounding energy transit, and a
new EU–Russia Gas Advisory Council to exchange views on future gas trends.
The effectiveness of these measures is clearly debatable, given the successive
‘gas crises’ that neither forum helped to prevent or solve. Still, the Commission
clearly comes across as a liberal actor and has consistently made use of general
regulatory rules in addressing energy supply risks, although these rules leave
some room for manoeuvre when it comes to implementation (see below).
A. Goldthau & N. Sitter: The Commission’s external energy policy 1463
Including external suppliers in single market rules
With regards to challenges arising from external companies, our principal
finding is that the Commission extends its standard policy instruments for liberalizing
the gas sector to non-EU firms. Notwithstanding the member states’
room for manoeuvre, the basic principle is that all firms active within the EU
have to comply with EU competition rules and energy market regulation.
The best example is the end of Norway’s GFU. More controversially, this
implies that non-EU firms that operate in the EU market are bound by its
rules, as the Microsoft cases illustrated (e.g. Case T-201/04).2
In effect, the
Commission’s tactics in terms of both liberalizing EU gas markets and ensuring
that the rules cover external suppliers have been guided as much by pragmatic
problem solving as by liberal principles. The most obvious example is the socalled
‘Gazprom clause’ in the 2009 Third Energy Package (Council of Ministers
2009: Art. 11). This was tailored specifically to address the failure of the
ECT and concerns about Gazprom’s dominant position (Eikeland 2011). It
not only requires that non-EU firms comply with unbundling rules as far as
their EU operations are concerned – what Cottier, Berkutova-Matteotti and
Nartova call a kind of ‘conditionality for firms’ – but it also stipulates that
member state authorities that certify transmission operators should ensure
that non-EU firms’ ownership does not put security of supply at risk, a requirement
that does not apply in the case of EU firms (Cottier et al. 2011). The
‘Gazprom clause’ thus opens for considerable deviation from the liberal
market model.
What is more, the Commission has sought to extend EU competition rules
and energy market regulations to third countries and make them applicable
to their companies, operators and regulators. The obvious case again is the
Energy Community Treaty, which extends single European market rules to
the EU’s near abroad. To be sure, some EU member states have openly challenged
the Commission’s approach and have pushed for the establishment of
‘national champions’ as a way to counterbalance the lopsided market power
of non-EU energy firms. A case in point here is the GdF (Gaz de France)Suez
merger of 2008, promoted by the French government. Still, the EU
Commission has abstained from supporting these efforts, and instead stuck to
competition policy tools and related regulations across the board. That said,
we find some room for heterogeneity in the policy tools as applied by the
Commission either directly or in its oversight of national regulators. This
becomes clear in some of the Commission’s efforts to deal with the next four
challenges, related to making energy markets work.
Addressing lack of transparency as a market failure
The Commission has made increasing transparency in international energy
markets a key policy objective. While the oil market may be the only truly integrated
commodities market on the planet, around half the international crude oil
1464 Journal of European Public Policy
trade still takes place bilaterally through medium and long-term contracts. Even
the part that is subject to spot and futures trading lacks some key characteristics
of fully functioning markets. Important producers, such as Saudi Arabia, reveal
neither capacity nor reserves; key consumers, such as China, conceal their level of
demand. Even the available market data suffer from a lack of accuracy and
common standards of measurement (Holscher et al. 2008; International
Energy Agency [IEA] 2009). A key objective of the Commission therefore is
to smooth out price volatility by providing openly accessible information. The
International Energy Agency is tasked with providing such data for oil
markets (but only for the OECD countries). The Commission supports its
efforts at three levels: direct support for IEA and the Joint Oil Data Initiative
through Eurostat; collection of data on agreements between EU firms and
their third-country suppliers; and market statistics pertaining to the EU.
In natural gas, the Commission was the driving force behind a Council
decision of 2012 institutionalizing the exchange of information on member
states’ bilateral energy agreements with third countries (European Parliament
and the Council 2012). Compared to oil, European gas markets are, if anything,
even further from the textbook model of an open market. Because gas is primarily
transported by pipeline, most trade remains regional. For historical reasons
the gas trade outside North America is dominated by long-term take-or-pay
contracts (the buyer pays even if they do not take the gas) and is therefore bilateral,
with prices often pegged to oil. The challenge as identified by the Commission
lies in disclosing pricing arrangements between external suppliers and
individual European countries. This can be interpreted as an effort to curb
price discrimination (which has long characterized European gas markets) as
well as an attempt to shift information asymmetries to its own favour.
Either way, the Commission’s measures are all scored as fully liberal, in terms
both of policy tools and their application. Bilateral arrangements and challenges
related to non-disclosure by market actors have been consistently addressed by
efforts to gather and disseminate openly accessible information.
Managing external shocks
The EU has taken several steps to address potential price or supply risks stemming
from non-energy events. In oil, events such as war (e.g. the Iran–Iraq
war), domestic political turmoil in producer countries (e.g. in Nigeria’s Niger
delta) or industrial disputes (e.g. the 2002 PDVSA strike in Venezuela) can
trigger severe price shocks. Here, the EU’s policy efforts have centred on buffering
oil price shocks by maintaining and managing strategic petroleum stocks,
which can be released to counter the effect of an external shock. It does this
by supporting the IEA’s co-ordination of release of stocks in emergencies.
With regards to gas, disputes between a producer and a transit country can
have severe repercussions for third-party consumers. A case in point is the
two-week 2009 crisis between Russia and Ukraine, which interrupted gas
supplies to five South-East European countries (and led to reported losses of
A. Goldthau & N. Sitter: The Commission’s external energy policy 1465
some $1.5 billion for Gazprom). Reacting to that, the EU now requires member
states to hold stocks and put in place measures for dealing with disruptions, and
it has promoted measures to make supply networks more robust (e.g. transEuropean
energy networks, interconnectors and reverse pipeline capacity). In
all, the Commission’s measures are clearly directed at managing externalities
and coping with their effects, rather than preventing them from occurring,
and is thus are fully in line with the regulatory state logic and the notion of
liberal policy tools.
Coping with imperfect competition
The Commission has taken on the challenge to tackle powerful producer cartels
and monopolies among the EU’s external suppliers. In natural gas, these efforts
come against the backdrop of market power shifting (back) to Russia and other
Eurasian producers in the 2000s, after a decade of a post-communist ‘gas
bubble’ (Stern 1995). The Commission attempts to deal with this through competition
law, e.g. the above-cited break-up of the GFU and decisions that oblige
firms that supply the EU market to remove ‘destination clauses’ that restrict a
buyer’s freedom to resell gas anywhere in the EU. It has also launched antitrust
cases against monopoly supplier Gazprom, based on ‘concerns that
Gazprom may be abusing its dominant market position in upstream gas
supply markets in Central and Eastern European Member States’ (European
Commission 2012b), and vetted member states’ (or their firms’) bilateral
deals with main suppliers. In oil markets, imperfect competition is a problem
at the global (not the regional) level, and mainly related to OPEC controlling
some 43 per cent of global oil production, around 60 per cent of globally
traded oil and 72 per cent of proven reserves (BP 2013). The Commission’s
efforts with respect to oil are therefore channelled through the IEA. Overall,
therefore, the finding is that the Commission’s efforts centre on making
markets function more efficiently (and managing market risks) rather than
counterbalancing lopsided market power of key suppliers.
However, there are some important exceptions to the Commission’s liberal
strategy. Two cases merit attention. First, the Commission has proposed what
effectively amounts to a gas buyers’ consortium in the shape of the Caspian
Development Corporation. While the project has effectively been halted, the
implicit aim was to pool EU consumer power vis-a`-vis Central Asian producer
states in order to secure large volumes of gas for Europe and diversify sources of
supply beyond Russia (IHS CERA, 2010). Second, the Commission engaged in
negotiating Poland’s long-term gas contracts with Russia in 2010. The Commission
acting as a ‘referee’ and vetting deals negotiated between its member
states and third parties can be regarded as ‘liberal’, aimed at ensuring compliance
with single market rules. It can, however, also be a means to throw consumer
weight behind deals with strong third-country suppliers (European Parliament
2012). Both examples take the Commission considerably beyond its regulatory
state role. Although the Commission’s active role in supporting member states
1466 Journal of European Public Policy
in negotiations with Gazprom/Russia and the Caspian initiative constitute nonliberal
responses to a lopsided regional gas market, they can be seen as secondbest
efforts to address market failures.
Providing and supporting physical infrastructure
With regard to energy infrastructure, the Commission has supported the establishment
of pipelines, interconnectors and other transport infrastructure that
exhibit public goods characteristics. This is primarily an issue in natural gas,
where pipeline multiplicity is a public good inasmuch as it reduces the EU
gas market’s reliance on a single external supplier (Russia) or a dominant
transit route (across the Ukraine). The Commission takes a two-pronged
approach to this challenge.
On one hand, it extends its competition-driven model beyond its own
borders by liberal measures in its effort to build markets. The Commission
has, for instance, asked six EU member states to renegotiate their deals on the
planned South Stream pipeline bringing gas through the Black Sea to SouthEast
Europe. Standard liberal measures to make markets work include the
INOGATE technical assistance programme to promote construction of interconnector
infrastructure for the Eurasian gas network, or the multilateral
TRACECA agreement, which aims at supporting pipeline infrastructures
from and to the Caspian Sea.
On the other hand, the Commission also supports infrastructure projects in
order to overcome the public goods aspect of the pipeline problem. This sometimes
requires compromising on competition policy. Here, the Commission’s
tools include both financial support and regulation. Examples include the exemption
of the Nord Stream pipeline between Germany and Russia under the Baltic
Sea from some single market rules, and the Nabucco pipeline initiative that was
designed to establish a ‘southern corridor’ to Central Asian gas circumventing
both Russia and the Ukraine. The EU also made a financial commitment to
Nabucco that included a grant for a feasibility study and 200 million euro
from the European Economic Recovery Programme. Moreover, the Commission
– notably in the persons of energy commissioner Oettinger and president
Barroso – has engaged in direct talks with potential supplier countries in the
Caspian region (European Commission 2011). While this does not amount to
Russian-style energy ‘diplomacy’ (Stulberg 2008), it certainly leaves the
‘liberal’ paradigm. Still, and although Nabucco eventually lost out to the rivalling
Trans Adriatic Pipeline (TAP) project, these decisions and actions can be seen as
efforts to help supply public goods (pipelines). At the same time, they may be
interpreted as efforts to support infrastructure projects designed to circumvent
dominant external players such as Gazprom/Russia or the Ukraine. While not
liberal in outlook, these efforts to ‘make markets work’ by diversifying supply
(and thus increase gas-on-gas competition) represent an effort to compensate
for the failure to extend single market rules on trade, transit and investment to
the former Soviet states.
A. Goldthau & N. Sitter: The Commission’s external energy policy 1467
CONCLUSION: THE MOSTLY LIBERAL EXTERNAL FACE OF
THE EU REGULATORY STATE
Overall, our main finding is that the Commission – and the EU as a whole –
has indeed adopted a liberal paradigm, but with plenty of room for ambivalent
interpretation. This points towards two broad conclusions. First, in external
energy policy the Commission is – mostly – a liberal actor, even as the
world of energy turns more realist. Second, it is so by choice. Although the
institutions and policy tools of the regulatory state constrain the Commission’s
external actions, its toolbox contains more than simply regulatory tools. When
it comes to how to build markets for energy and extend their geographical
reach, the Commission’s strategy (and indeed the strategy of the EU as a
whole) is overwhelmingly liberal. Its overall aim is the establishment of rulebased
open market energy trade, rather than ad hoc bilateral arrangements.
When it comes to making markets work, the findings are more diverse.
When addressing asymmetric information and managing the consequences
of external shocks to price or supply, the liberal toolbox suffices. However,
when it comes to pipeline politics and coping with Gazprom’s dominant
supply role, regulatory policy tools are supplemented by diplomacy, finance
and ad hoc exemptions to open market rules. We argue that this represents
a pragmatic solution to the dilemma the EU faces in an increasingly ‘realist’
international context: if it is not possible to extend the regulatory state, it
might be necessary to compromise on some of its principles abroad in order
to maintain the regulatory market model at home. The conclusion that the
EU is a liberal actor in a realist world therefore merits the adjective mostly.
This adjective is of considerable significance. The fundamental challenge for
the Commission is that the EU is increasingly caught between its liberal
market model and a world less and less inclined to stick to this model. The
EU’s response has been to stick to its liberal guns – by choice and with conviction
– even if this no longer fully resonates in the new environment, but to
explore pragmatic use of a wider range of policy tools. Its use of non-liberal
tools represents a second-best strategy, an effort to work around problems
when its primary strategy fails.
Biographical notes: Andreas Goldthau is Marie Curie Senior Fellow and Visiting
Scholar, Geopolitics of Energy Project, Belfer Center for Science and International
Affairs, Harvard Kennedy School of Government. Nick Sitter is
Professor in the Department of Public Policy, Central European University,
and the Department of Accounting, Auditing and Law, BI Norwegian Business
School.
Addresses for correspondence: Andreas Goldthau, Harvard Belfer Center, 79
JFK Street, Cambridge, MA 02138, USA. Email: andreas@goldthau.com/ Nick
Sitter, Central European University, Nador ut. 9, H-1051 Budapest, Hungary.
Email: nick.sitter@bi.no
1468 Journal of European Public Policy
ACKNOWLEDGEMENTS
The authors gratefully acknowledge the support of the EU FP7 large-scale integrated
research project GR:EEN Global Re-ordering: Evolution through European
Networks, European Commission Project Number 266809. We also
thank the three referees for their helpful comments.
NOTE
1 The reporting in Agence Europe was checked against a full data set of more than 800
energy-related acts, including a large number of technical decisions, reported by the
Commission in the same timeframe.
2 Between 2000 and 2013 the Commission investigated a number of possible abuses of
dominant position by Mircosoft on the EU market for computer operating systems,
including the company’s linking of Media Player and Internet Explorer to its operating
system. Microsoft received fines of several hundred million Euro, and was
required to alter the Windows software sold in the EU. The list of investigations
and cases is available on http://ec.europa.eu/competition/elojade/isef/case_details.
cfm?proc_code=1_37792, accessed 25/02/2014).
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