1. 1 Energy Policy and Central Energy Authorities as Pillars of Reforms. The Bulgarian Experience (1999-present) Presented by Vladimir Stariradev Director of European Integration and International Projects Bulgarian Ministry of Energy and Energy Resources Seminar “Institutional Aspects of Reforms of the Electricity Market” Rome, 24 March 2003

2. 2 Bulgarian energy Policy Most important tasks of the government: –to harmonize regulatory framework with EU acquis and provide conditions for a competitive energy market; –to establish a modern market-oriented energy sector in line with EU directives on electricity and gas markets. Energy strategy developed and approved in July 2002 outlining an energy policy in line with EU energy policy and defining the following directions for action: Establishing a sustainable legal framework for investment and trade; Establishing competitive market relations in the energy sector based on cost-reflective tariffs and free contracting; Establishing the necessary legal, regulatory and market environment before the implementation of new large investment and privatisation projects; Promoting use of renewables and improvement of energy efficiency as a means for increasing overall economy competitiveness, security of energy supply and environment protection; Social protection through shifting government subsidies from producers to vulnerable consumers and implementation of large scale energy conservation measures and socially oriented tariffs; Strengthening of Bulgaria’s position as a reliable partner for supplying electricity and transit of energy materials and products.

3. 3 Legal basis (1) Energy and Energy Efficiency Act (EEEA) - mid 1999: unified regulation of line-bound energy subsectors; state governance of energy sector; rights and obligations of actors in generation, import, export, transmission, distribution and sale of electricity, gas and heat; improving energy efficiency and promoting the use of renewables; institutions developing and implementing national energy policy: –State Agency of Energy and Energy Resources - overall energy policy; –State Energy Efficiency Agency - energy efficiency policy; –State Energy Regulatory Commission - independent regulatory body. Act supplementing and amending EEEA - end of 2001: changes in energy sector administration (energy policy developed and carried out by the Minister of energy and energy resources); legal basis for SERC strengthening and financial independence; supplemented regulation of commercial relations in heat and electricity subsectors;

4. 4 Legal basis (2) Ordinances adopted in 2002 on: rules of access to electricity transmission and distribution networks - further develops the possibility for direct contracting between independent producers and eligible customers using the electricity transmission and/or distribution networks; rules of access to gas transmission and distribution networks - gives detailed regulation of the possibility for natural gas production enterprises and eligible customers for contracting sale of natural gas using the transmission and/or distribution networks to meet the own needs of customers; electricity, heat and natural gas price setting and application - set the rules for price regulation, including setting, indexation, approval and control of their application, in accordance with the EEEA requirements.

5. 5 Draft of new Energy Act to be discussed by the Council of Ministers in March 2003; provides a clearer definition of relationships in the energy sector and energy efficiency as high priorities of the government’s economic policy; sets the commitments of the state regarding the development of the institutional, legislative and financial prerequisites for implementation of this policy; enables the implementation of a new market model concerning the electricity and natural gas sub-sectors and the development of internal competitive energy market; strengthens the regulatory body in the energy sector, the Energy Regulatory Commission (ERC), by ensuring its independence; revokes the monopsony model and introduces a regulated third party access to electricity and gas networks; gives grounds for the adoption of secondary legislation to regulate intermediate stages of market opening in full compliance with the electricity and gas market directives at the same time facilitating supplements and amendments depending on future development of the national electricity market.

6. 6 The electricity market model in the transition period accounting and/or legal unbundling of activities; single buyer of electricity generated and imported in the country; state control over new investments in generation - tendering procedure for construction of new generation capacities; generation, transmission and distribution separated in 2000 into independent companies - the formerly vertically integrated National Electricity Company (NEK) split into: –seven independent generators; –seven distributors; –national electricity transmission company.

7. 7 The new electricity market model regulated third party access replaces the monopsony model and a competitive market will be gradually established; first stage of the model implementation - based on bilateral contracts and a balancing market; in the longer-term - introduction of a spot market; gradual deregulation of generation; complete opening subject to reciprocity regarding: –EU member-states – as of the date of accession of Bulgaria to the EU; –other states – as of entering into force of an international agreement on mutual observance of EU internal market rules.

8. 8 Bilateral contracting market model

9. 9 EXPORT HV customers Public retailers DISCOs IMPORT NEK (Public supplier) HPPs & PSHPPs Traders IPPs – HPP, Autoproducers, CHP Eligible customers TSO Producers selling availability to NEK – condensing TPPs Bilateral contracts for electricity supply Regulated part of the marketDeregulated part of the market

10. 10 Ministry of Energy and Energy Resources (MEER) Established in December 2001 with amendments to EEEA. Develops and carries out the national energy policy, by: developing an Energy strategy to be approved by the Parliament; adopting plans for the overall energy balance of the country; approving programmes and investments on energy efficiency, environment protection, restructuring and privatization in the sector; developing secondary legislation concerning activities in the sector; issuing every two years a list of the necessary new: –generating capacities above 25 MW –heat transmission networks –natural gas distribution networks and storage facilities; proposing for approval by the Council of Ministers the construction of generating capacities above 200 MW or of nuclear power plants; exerting the rights of the state as a shareholder in energy sector companies; grounding proposals for subsidizing activities in the energy sector; organizing the issuance of concessions for production of energy resources; organizing the harmonization of Bulgarian legislation with the EU acquis.

11. 11 State Energy Regulatory Commission (SERC) (1) legal entity under the Council of Ministers (CM), competence in: issuing and withdrawing of permits and licenses; regulating prices and tariffs; developing and proposing for adoption by CM secondary legislation concerning issuing permits and licenses and determining the rules for setting of electricity, heat and natural gas prices; monitoring of energy companies for compliance with market principles, issued licences and price formation rules. permanently acting collective body (7 members), supported by the State budget; members and Chairman nominated by CM and appointed for a period of 5 years, eligible for a second mandate; supported by an administration amounting to over 80 people; SERC sessions are open, but it may decide for some to be closed; SERC decisions are taken with a majority of 2/3 of total number of members, may be appealed within 30 days in front of the Supreme Administrative Court.

12. 12 State Energy Regulatory Commission (SERC) (2) Cost-reflective approach applied in setting prices (cost plus method, i.e. covering the costs and a rate of return on assets), based on the following principles: ensuring balance between the interests of the energy enterprises and the consumers; creating incentives for enhancing efficiency of the energy enterprises, which are subject to price regulation; providing equal conditions for the different producers, suppliers and consumers; taking into consideration the economically grounded costs, including costs for: –maintening of reserve capacities necessary for the reliable supply with electricity, natural gas and heat; –supply and maintenance of fuel reserves; –achievement of energy efficiency, environmental protection and nuclear safety; –radioactive waste storage and decommissioning of nuclear facilities; –maintenance and economically grounded investments programs; return on assets in line with capital market conditions; ban on cross-subsidizing of consumers and producers.

13. 13 Strengthening of SERC 1. Amendments to EEEA: officials entitled to draw up statements for found infringements, based on which penalties are imposed. primary allocator of State budget funds - financial independence, stability and independence in taking decisions; possibility for extra financial bonuses provide for employment of highly qualified experts in the administration. 2. Draft of new Energy Act - Energy Regulatory Commission (ERC): right to issue secondary legislation within its competence; co-financing of ERC both from the budget and from collected licensing fees conditions provided for the financial independence of ERC, its independence in taking decisions and stability; extension of competence - in issuing tradable green certificates for electricity from renewables and cogeneration and protection of consumers. energy prices are regulated by ERC and not regulated in cases competition is available; ERC will gradually set free from regulation the prices of energy enterprises when it decides that they carry out their activity in competition.

14. 14 Regional Technical Coordination Centre (RTCC) Bulgaria proposes the establishment of a RTCC in order to: –institutionalize relations among national energy sector authorities of the different SEE countries; –support coordination of various regional initiatives and energy projects of common interest; To complement the adopted institutional structure of cooperation under the Athens process, a permanent RTCC staffed from all SEE countries could coordinate the activities of the three regional task forces already envisaged - SE-CEER, SE-ETSO, SE-MFG; If also represented in the RTCC, the donors and the EC or its Secretariat would add value sharing experience and providing policy advice.

15. 15 Athens Forum (SEEERF) (Integration EC/SEE - Political Coordination) CEERETSO EFET ?? UCTE High Level Group Ministerial Council Orientations – Guidelines – Compliance Requirements - Training SE-CEER SE - ETSO SE - MFG SE - EKC ALBBiHBULCROGREKOSMACMONROMTURSER LEGAL & POLICY DEV REGULATORY SYSTEM OPER MARKET OPER BENCHMARKING CHANGE MGT REGIONAL TECHNICAL COORDINATION CENTRE EUROPEAN COMMISSION EC Secretariat DONORS Athens Process National Reforms Implementation

16. 16 Arguments for locating RTCC in Sofia Sofia hosted for 7 years the Black Sea Regional Energy Centre established with EC support which carried out projects related to the energy sector regional development. RTCC would make use of available premises, equipment, data-base, contacts. This experience will contribute to operate RTCC efficiently right after establishment. Bulgaria is close to the optimum location regarding travels from most countries in the region thus minimizing related costs; Bulgaria has long-standing constructive relations in the energy sector with the other countries in the region; Bulgaria is a reliable producer and exporter of electricity and its role in transiting natural gas, oil and electricity will continue to grow due to its geographic location; There is political consensus in Bulgaria in support to the establishment of such centre. Bulgaria commits to provide up to 0.3 million EURO to cover costs related to the establishment and functioning of RTCC during the first year of its operation, including: –cost of premises (rents) and equipment to be used by the RTCC; –salaries of local experts and support staff; –part of RTCC operational costs.

17. 17 Expected results of RTCC establishment: facilitated coordination between the layers of the Athens process institutional structure, the donors, EC and the countries; strengthened involvement of SEE countries in the management of the Athens process components; improved organization of activities under joint initiatives and increased efficiency of identification, approval, co-funding, management and monitoring of projects of common interest; minimizeded overlapping of works, efforts and spent funds under different energy projects of regional scale.