7.

СОВЕТУВАЊЕ
Охрид, 2 − 4 октомври 2011

Daniel Georgievski
EVN Macedonia AD, Skopje

UNBUNDLING OF ELECTRICITY NETWORK OPERATORS IN MACEDONIA

ABSTRACT
Republic of Macedonia is signatory party to the Energy Community Treaty (ECT) since 2005.
As a Member Country to the ECT, Macedonia is obliged to harmonize its national legislation with the
requirements from European Directives on internal market in electricity and natural gas.
The former energy legislation in Macedonia lacked provisions on unbundling of electricity
network operators which are considered as main pre-requisite for electricity market opening and
introduction of competition on the retail market. However, the new Law on Energy which entered into
force in February 2011 imposes obligation to the electricity network operators to unbundle its
vertically integrated functions (electricity supplying and electricity generation) from network function.
The deadline for unbundling of network operators is 31.10.2011.
The main goal of this paper is to analyze the obligation for legal, management, functional and
financial unbundling of network operators.
Keywords: vertically integrated undertaking, control, unbundling, network operator

1 INTRODUCTION
The unbundling of network operators in Macedonia is well known process since 2004 when
state-owned vertically integrated undertaking AD ESM – Skopje which embraced electricity
generation, transmission, distribution and supply functions was unbundled to electricity transmission
company (AD MEPSO - Skopje) and electricity generation, distribution and supply company (AD
ESM-Skopje). In 2005 this process continued and AD ESM – Skopje was further unbundled on
electricity generation company (AD ELEM – Skopje) and electricity distribution and supply company
(AD ESM-Skopje) privatized in 2006 by EVN AG from Austria. Before entry into force of the new
Law on Energy in February 2011, the unbundling of supply function from distribution functions was
not mandatory and thus distribution operators has performed both functions – grid operation and
supply functions1. Thus, on retail level there was no market liberalization.
Nevertheless, the new Law on Energy which transposes the Directive 2009/72/EC of the
European Parliament and of the Council concerning common rules for internal market in electricity is
prescribing clear and unambiguous obligation for separation of supply/generation function from
network function.

2 UNBUNDLING OF NETWORK OPERATORS

2.1 Definition on unbundling
There is no specific definition on unbundling of network operators in the EU Directive
2009/72/EC. Such obligation is usually attached to network operators which are part of vertically
integrated undertakings. However, the EU Directive 2009/72/EC defines the terms of vertically

1
With the amendments of the Law on Energy in 2008, the Transmission System Operator MEPSO has ceased to
perform wholesale supply of electricity

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integrated undertaking and control of these undertakings upon which the unbundling obligation is
imposed.
Under the EU Directive 2009/72/EC, a vertically integrated undertaking means an electricity
undertaking or a group of electricity undertakings where the same person or the same persons are
entitled, directly or indirectly, to exercise control, and where the undertaking or group of undertakings
perform at least one of the functions of transmission or distribution, and at least one of the functions of
generation or supply of electricity2. In this context, control means rights, contracts or any other means
which, either separately or in combination and having regard to the considerations of fact or law
involved, confer the possibility of exercising decisive influence on an undertaking, in particular by:
(a) ownership or the right to use all or part of the assets of an undertaking;
(b) rights or contracts which confer decisive influence on the composition, voting or decisions
of the organs of an undertaking 3.
From the above definitions, it can be concluded that beside performance of multiple energy
activities by single undertaking or group of undertakings, a vertically integrated undertaking is
considered a company where its management exercise direct or indirect control over the network
functions and generation/supply functions. Moreover, the unbundling regulation refers primarily to the
network operators which are deemed as vertically integrated undertakings controlled by single
management structure. In sum, the unbundling can be defined as legal and financial separation of
vertically integrated company where it performs at least one of the functions of transmission and
distribution, and at least one of the functions of electricity generation or supply of electricity.
2.2 Main goal of unbundling of network operators
The main goal of unbundling of network operators is to create minimum conditions for
electricity market liberalization and competition. Also, the unbundling regulation is to perform de-
concentration and de-monopolisation of competitive functions that are hold by single undertaking on
the electricity market. By this are created conditions for competition among electricity generators,
suppliers and traders whose entry on the market could be blocked by the vertically integrated
undertaking holding grid functions and supply/generation functions in the same time. Also, the
objective of unbundling regulation is to cease cross-subsidies inside vertically integrated company
which may distorts competition between suppliers and generators.
Other goals that are intended to be achieved with unbundling are:
− Enabling regulated third party access to the electricity grids;
− Stimulation of energy efficiency and rational energy consumption;
− providing safe, secure and quality electricity supply to final customers;
− enabling customers to enjoy universal service;
− granting the right to customers to chose their electricity supplier according to their will.
However, beside implementation of unbundling of network operators, there must be
comprehensive rules for objective, transparent and non-discriminatory market functioning, as well as
regulated third party access to the network and connection of new generation units to the grids.
2.3 Application of unbundling obligation according to the Law on Energy
In Macedonia, the national legislation (Law on Energy) is requiring from network operators to
implement legal, management, functional and financial unbundling of the network functions from the
generation/supply functions. This obligation is considered as novelty, since the former legislation
lacked provisions on legal, management and functional unbundling of network operators from supply
function. However, the former legislation imposed obligation for separation of accounts of all
electricity functions performed by network operators, but this was not enough for real unbundling.

2
EU Directive 2009/72/EC
3
EU Directive 2009/72/EC
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Furthermore, the Law on Energy does not put an obligation for separation of ownership over
the assets of the network operators. The law is not regulating whether network operators must separate
its own grid assets if they are affiliated to electricity generation or supplying functions.
Legal unbundling
According to the Law on Energy, network operators performing network function electricity
cannot hold licenses on electricity generation, trade, supply or supply of last resort activities. On the
other hand the Directive is prescribing that network operators must be independent at least in its legal
form, organization and decision making from other activities not related to the network functions.
Although the Law on Energy differs from the Directive, however in both cases is clear that
network operators must be separate legal entities from the generation, trade and supply of electricity
functions knowing the fact that performance of electricity functions is licensed activity by the
competent regulatory authority. The network operators are free to choose the legal form of the
unbundled company, providing sufficient independence from the vertically integrated company. The
independence of network operators can be secured through transformation of the legal form of
vertically integrated undertaking. Usually, the obligation for legal unbundling is fulfilled by network
operators through full legal and asset separation of the vertically integrated company or through
establishment of new companies for performance of unbundled functions without separation of assets.
Management unbundling
In addition to legal unbundling, the Law on Energy sets out certain limitation for persons
which are responsible for the every-day management of the network operators. For the purpose of
providing independence in the performance of electricity network activities, the network operators are
obliged to secure that the persons responsible for management and operation at the network operator
cannot participate in the management and executive bodies in the companies holding electricity
generation, supply, trade or other electricity licenses. Furthermore, the law is requiring independence
in the work and decision-taking of persons responsible for management and operation of network
operator. Hence, the management of network operators cannot perform executive functions in the
supply/generation companies.
This restriction implies on separate management structures in the network operators and other
license holders in order to avoid double functions. Also, the limitation for non-participation in the
every-day management and independence in the decision-making is intended to prevent concentration
of powers in a single management structure because it may discriminate other suppliers/generators on
the electricity market. Therefore, the network operator should not perform their daily business upon
instructions from supply/generation companies and to take measures against competitors. However,
the law does not contain provisions which will determine the actions of network operators that are
considered as discrimination of competition and favouring of their daughter companies. In such legal
environment anybody may accuse network operators for discrimination even if they are not capable to
realize transaction due to lack of capacity.
As long as competitors suspect in biasness of the network operators to their daughter
companies there will be conflicts and misunderstandings on the electricity market which regulatory
authorities must resolve. The competitors will always suspect in the management behaviour and
decision-making procedure on a group level and will interpret any action of network operator as
conspiracy against them.
Therefore, the competitors will push towards full ownership unbundling of network operators
claiming that as long as there is single ownership structure in network operating companies and
generation/supply companies there will discrimination on the electricity market.
Perhaps, the only solution for this legal gap is adoption of transparent and non-discriminatory
market rules by regulatory authorities applicable for all market participants.
Functional unbundling
The Law on Energy requires decision-taking related to assets for the system operation,
maintenance and development to be made independently from the interests of the vertically integrated
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company to which the operator belongs or the interests of the related company. Thus, all commercial
and operational decisions related to the operation, maintenance and development of the network must
be made by the network operator, without influence of the supply/generator companies or higher
corporate structures. This requirement is important for creation of fair conditions for competition
among suppliers/generators within the grid. The network operator should be responsible for
development and up-grading the grid especially in the parts where congestions and drop of electricity
quality occur due to exceeding of network capacities. The network operators should assess the
possibility for extension of interconnectors with other electricity systems that will contribute to higher
security of supply.
Furthermore, the network company should have enough human and physical resources for
every-day operation with the electricity network, as well as sufficient budget for maintenance and
investment in the electricity network.
In case when the network operator does not own the assets i.e. the ownership of the assets is
within the vertically integrated company, the network operator decisions regarding the functioning,
maintenance and development of the network should be implemented on a company level. However,
the law is lacking provisions what in case of non-compliance of the parent company. Such flaws in
some countries are mainly resolved by intervention from the regulatory authorities.
Financial unbundling
The electricity network operators and other regulated entities have obligation for maintaining
separate accounts for each energy and non-energy activity which is performed. The financial
unbundling is not only obligation set out in the law, it is also included in the electricity licenses of
electricity undertakings as well as in the price regulation. Moreover, the accounting should be
performed on the basis of valid and accepted international accounting standards (IFRS). Joint stock
companies which are regulated companies must perform annual financial audits by licensed auditing
company which guarantees the accuracy of the financial reports.
The obligation for financial unbundling is strengthen with the requirement for legal unbundling
of network operators and thus each separate company is responsible for their financial reporting to the
regulatory authorities. The role of financial unbundling however is to monitor proper cost allocation of
the network operators since they will remain to operate as regulated (controlled) entities by the
regulatory authorities. So far there is no evidence of abusing of cost allocation by the network
operators. Even before unbundling took place, the costs for operation of network operators in
Macedonia was maintained internally with the company for each electricity activity which was
performed. The requirement for financial unbundling can be interpreted as pre-cautionary measure to
avoid improper and non-transparent cost allocation of grid operation to prevent non-realistic
declaration of costs in the price regulation process governed by the regulatory authorities.
From regulatory prospective, the inaccurate cost allocation may lead towards unjustified costs
of network operator on one hand and cross-subsidisation in favour of the supply business on other
hand. This causes distortion of competition in the supply market as well as harming of the network
users who will pay higher network tariffs due to increased costs of network operators. Therefore many
regulatory authorities consider that “price caps regulation” instead of “cost reflective regulation” of
network business can be an effective instrument to considerably reduce the incentives and possibilities
for integrated companies to shift costs from the supply/production business to the network business.
However, cost caps cannot be considered as effective instrument for reduction of the cross-
subsidisation because the network operators need cost reflective tariffs which will provide enough
financial assets for safe/secure operation of grids, as well as their extension and modernization.
Unfortunately, in Macedonia price caps are related to the current pricing methodology which
caps usual costs for operation of network operators, rather to prevent cross-subsidization between
network activities with other competitive activities. Thus the regulatory authority does not fully accept
the costs of network operators regarding: WACC, costs for procurement of grid losses, bad debts,
salaries, other services, costs for asset maintenance, extraordinary costs (court taxes, daily allowances
 MAKO CIGRE 2011 C5-063R 5/7

for business trips, etc).All of these cost cannot be considered as shifted costs from supplier to network
operator.
2.4 Exemptions from unbundling obligation
The Law on Energy provides certain exemptions from application of the unbundling
obligation for small and isolated network operators. The network operators are exempted from
unbundling of supply function from grid operation function if they serve less than 100 000 customers
within their grid. The goal of this exemption is not to complicate the functioning of the electricity
supply in small systems where market liberalization cannot foster competition among suppliers.
2.5 Extension of unbundling obligation
Beside electricity networks, the unbundling obligation in the Law on Energy is extended to
district heating and natural gas networks. While for natural gas networks there is legal coverage in the
EU directives, in the scope of EU legislation there is no unbundling requirement for district heating
network operators. The reason for unbundling exemption within EU is:
− The district heating is mainly competence of local self government (regulatory authorities do
not regulate district heating networks).
− The district heating networks are small and isolated (non-interconnected) grids located on a
small territory where it is impossible to foster competition
− There is no need for raising of the cost of operation due to unbundling obligation where is no
incentive for construction of new district heating capacities and competition
− the district heating cannot be considered for public service because this type of service is
replaceable with other source of heating like electricity, biomass and natural gas.
− district heating is not comparable with the electricity business because is activity of public
interest on a local level affecting limited group of legal and natural persons.
The main reason for unbundling of small network systems in Macedonia is the view of the
regulatory authority that they need clear financial statements of each business activity for price
regulation issues. The regulatory authority had experienced situations of cost spill over of regulated
and non-regulated activities which are performed by public undertakings. However, this problem can
be overcame with price regulation mechanisms and financial separation of all business activities rather
than legal unbundling.

3 UNBUNDLING WITHIN THE SCOPE OF EU DIRECTIVE 2009/72/EC

In comparison with EU Directive 2009/72/EC, transmission operator in Macedonia is waived
from obligation for ownership unbundling, creation of Independent System Operator (ISO) or
Independent Transmission Operator (ITO). The law does not impose obligation for asset or ownership
unbundling nor interferes in the legal form of the companies that are going to perform generation and
supply functions.
In the EU Directive 2009/72/EC the unbundling obligation differs for the transmission system
operation and distribution system operations. Directive 2009/72/EC requires separation of vertically
integrated electricity transmission networks, by choosing from one of the following options:
− Full ownership unbundling; separation of ownership of transmission network from
supply/generation activities, or;
− Creation of ISO; vertically integrated undertaking remains owner of transmission assets while
the grid is operated by independent company, or;
− Creation of ITO; vertically integrated undertaking remains owner of transmission assets, but
certain organizational and management measures ensure the separation of transmission
activity from generation/supply activity.
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In contrast, the unbundling obligations for electricity distribution operators with EU scope
remains as previous directive of 2003 which prescribed obligation only for legal, management,
functional and financial unbundling of distribution system operators. The new electricity directive is
not imposing obligation to distribution system operators to enforce ownership unbundling of to create
ISO or ITO. The reason for such waiver for distribution system operators is related to the fact that
there is no experience whether new unbundling obligation for transmission system operators will cease
non-competitive behaviour of network operators and will contribute in promotion of competition
among electricity generators/suppliers. Unfortunately the unbundling obligations set in Directive
2003/54 did not bring the expectations for market liberalization.

4 CONCLUSION
The unbundling obligation for separation of network functions from generation/supply
functions is primarily related to the distribution system operator knowing that transmission system
operator do not perform supply function and does not possess generation units. The unbundling do not
imposes obligation for ownership unbundling of network assets nor limits the form of legal entities
which are unbundled as separate entities.
In the context of fulfilment of unbundling obligation it is clear that the unbundling of supply
function from distribution function will inevitably raise the costs for operation (costs for using of
assets, procurement, intercompany charges for common services, etc). Also, there is no evidence
whether the unbundling obligation in Macedonia will enhance competition on a retail level having in
mind the scope of the electricity market, as well as vulnerability of domestic economy. Thus, the
unbundling will be considered as administrative measure derived from international accepted
obligation.
Perhaps in Macedonia the unbundling obligation should be focused on market liberalization
and stimulation of competition. The unbundling obligation has sense only in a competitive market
where integrated companies might be barrier for competition. In non-liberalized electricity markets
there is no evidence of abusing of dominant position of network operators which perform supply
function in the same time.
Therefore the unbundling in Macedonia should be implemented step-wise by liberalization of
electricity market, adoption of transparent and non-discriminatory market rules and strengthening the
capacity of regulatory authorities to monitor and sanction market behaviour of market participants. If
such pre-conditions cannot foster competition , than unbundling of network operators should be
implemented. Otherwise, implementation of unbundling without prior market liberalization will only
raise the costs for operation that final customers need to pay. The final outcome of premature
unbundling might be no or marginal competitors on wholesale and retail level and higher costs to
customers due to separation of network operators that perform supply function.
In the future, also, it should be discussed the separation of market operation function from
electricity transmission function. Unfortunately even EU Directive 72/2009 is not prescribing
obligation for creation of independent market operator and this issue in EU Member countries is
treated on a national level.

5 BIBLIOGRAPHY
[1] Directive 2009/72/EC of the European Parliament and of the Council of 13 July concerning common
rules for internal electricity and repealing Directive 2003/54/EC, Official Journal of the European
Union L211/55, 14.08.2009
[2] Law on Energy, Official Gazette of the Republic of Macedonia No. 16/2011
[3] Note of DG Energy and Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in
electricity and gas. “The Unbundling Regime.” 16.1.2004
[4] Gomez-Acebo&Pombo Abogados, SL and Charles Russell, LLP. “Unbundling of Electricity and Gas
Transmission and Distribution System Operators”. Final Report, 1 December 2005
[5] ERGEG. “Guidelines of Good Practice on Functional and Informational Unbundling” July 2008,
 MAKO CIGRE 2011 C5-063R 7/7

[6] ERGEG Public Document “3rd Legislative Package Input Paper 1: Unbundling”, Ref: C07-SER-13-06-
1-PD 5 June 2007
[7] ERGEG. “Guidelines of Good Practice on Regulatory Accounts Unbundling” Ref. E05-CUB-11-02, 30
April 2007
[8] Dr.Boaz Moselle, David Black, Martin White, “Implementing the Third Energy Directive in Ireland:
Options for the transmission network” 23 April 2010, LECG Ltd.