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Harmonisation within a merger of two spot power exchanges - Experiences by EEX and Powernext

APEX CONFERENCE 2008 IN SYDNEY | 13 October 2008Dr. Wolfgang von Rintelen • Director Legal & Compliance European Energy Exchange AG

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The Situation

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1998 Liberalization of the European Energy Markets in 1998

Spin-off of the EEX Clearing business into the subsidiary European Commodity Clearing AG

Merger of the former Leipzig Power Exchange LPX and the EEX, Frankfurt, to the European Energy Exchange AG

EEX, created as a result of the EU liberalisation of the European energy markets

Launch of the German Gas Exchange:EEX covers 60% of the German H-gas market volumewith the market areas BEB and E.ON GT

Further spin-offs within the European Growth Strategy of EEXSpot market (Power): EEX Power Spot GmbH Derivatives market (Power): EEX Power Derivatives GmbH

2002

2006

2007

2007+

2005Start of Trading of Emission Allowances within the EuropeanEmission Trading System (EU ETS)

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1992: energy exchanges in Europe- an empty landscape

5Source: Regional markets in Europe according to a strategy paper by the EU-Commission

2004: EU Vision - Through regional markets to European electricity markets

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1993 – 2004:History of the EU Regulation

1993: Investment Services Directive (ISD) 93/22/EEC 2004: Markets in Financial Instruments Directive (MiFID) 2004/39/EC

- Market Abuse Directive (MAD)- Capital Requirement Directive (CRD)- Capital Adequancy Directive (CAD)

Many of this regulations are currently under review Comittees of regulators in charge:

- ERGEG (European Regulators' Group for electricity and gas)- CEER (Council of European Energy Regulators)- CESR (Committee of European Securities Regulators)- CEBS (Committee of European Banking Supervisors)

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Today: overview of the national regulationsfor power spot markets in Europe

NordREG* recently made a assessment about the national regulationsin Europe (eight exchanges)

Summary for the power spot markets: Legislation/Ministry:

energy, exchange, financial and a mix of them Regulator/Supervisory Authority:

energy, exchange, financial and more of one Market Surveillance (MS):

All exchanges monitor compliance with the rulesbut only two exchanges have MS as a independent body

If more than one authority is in charge it is not common praxis to share information and work together on a formal basis.

*NordREG is a working group of Scandinavian Energy Regulators

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2008: Power exchanges and other market places in Europe - a colorful landscape

APX B.V.

Belpex SA

Borzen, organizator trgaz elektricno energijo, d.o.o.

ENDEX N.V.

European EnergyExchange AG

EXAA EnergyExchange Austria

Gestore del mercatoelettrico S.p.a.

Nord Pool Spot AS

Operadorde MercadoIbérico de Energia(Pólo Português) S.A.

Operador del MercadoIbérico de Energía(Polo Español) S.A.

Operátor trhu selektrinou a.s.

Operatorul Pietei deEnergie Electrica

OPCOM SA

Powernext SA

Towarowa GieldaEnergii SA

OMX AB /Nord Pool ASA

Tender to build anPower Exchange in UK

IntercontinentalExchange

Borsaitaliana TSO-initiative in Hungaria

EnergetickáBurza Praha

New CO2 market place

Auction officeCASC-CWE

Energy brokers,mainly London-based

Bolsas y MercadosEspañoles plansCO2 spot trading

European Market CouplingCompany (EMCC) GmbH

Imarex Group

Climex

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First Remarks

In Europe there is not a common standard for energy exchanges. MiFID covers only Commodity Derivatives Markets, not Spot Markets. Commodity Derivatives Markets are not the major task of MiFID, from

its origin it is a regulation for stock exchanges. The Regulation for Power Spot Markets as well as its structure of

supervision/legislation is quite different within Europe. There are (too) many commissions of regulators or supervisors in

charge for the Energy Markets within Europe.

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The Merger of Power Spot Markets

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These countries representmore than a third of European electricity production

Around 70% of Powernext participants are EEX participants

Around 30% of EEX participants are Powernext participants

Price correlation: over 90 percent

Early 2008: EEX and Powernext agreed on a cooperation

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Key aspects of the cooperation

Common Power Spot Exchange based in Paris

Common Power Derivatives Exchange based in Leipzig

Clearing of all spot and derivatives energy products through European Commodity Clearing AG (ECC)

Cooperation model open to further partners

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Implementation steps

Establishment of a common spot trading company namedEPEX Spot SE with registered offices in Paris.

The partner exchanges will integrate their entire spot trading activities in power under the umbrella of the SE by the end of the year. Both partners hold 50 percent of the shares.

EEX has transfered its trading in power derivatives to the newly established EEX Power Derivatives GmbH in Leipzig.

Retroactively as of 1st January 2009, Powernext will contribute the French power futures to the new GmbH [German limited liability company] in Leipzig and, in return, it will receive 20 percent of the shares in the company.

14Source: Regional markets in Europe according to a strategy paper by the EU-Commission

Fulfilling a big part of the European Vision

Western European market (2006-08?)

Nordic market

Baltic market (2008?)

Eastern European market (2006-08?)

South Eastern European market (2006-08?)

Italian market (2004)

Iberian market (2004)

GB/IRL market separate 2005integrated 2010?

Western European market (2006-08?)

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Impacts on the Power Spot Markets

The French Power Market will continue to be traded in Paris. The German Power Market will be traded in Paris as well as the Austrian and

Swiss Market. Will the French Energy Authority be responsible for this “new” Power

Markets? The German Exchange Authority will lose its responsibility for the German

Spot Market, but remains to be in charge for the Derivatives Markets.

The Task:

The Parties agreed to harmonise the Powernext Power Spot Market and the EEX Power Spot Market Rules and organisational structure and to have“the best of both”. That means inter alia:- Rules for transparency and proper market behaviour - Independent Market Surveillance Office- Exchange Council

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Differences and its handling

EEX Spot Market Governed by Public Law Exchange bodies are:

- Exchange Council (elected)- Exchange Board- Market Surveillance Office

Exchange has own rules and regulations and the opportunityto develop it

The Exchange Council decides about the rules and its changeson request of the Board

Traders become a member of the Exchange by admission

Powernext Spot Market Governed by Private Law No exchange specific bodies

necessary

Everything has to be ruled by agreements with the participants

Solution: We will „translate“ the contribution governed by German Public Laws into agreements to be accepted by the exchange participants under French Private Law.

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Open issues:legislative and regulatory level

But there are still some open issues:

How long will the energy market be a annex to the stock markets or is there a chance for tailor made regulations for the energy markets?

How will the interactions between the spot and the derivatives markets across country borders be handled by the authorities?

How long takes it to have harmonisation or at least information sharing of the authorities?

Who will supervise the European energy market across borders? When will the European energy exchanges have harmonised rules

and a harmonised organisational structure?

In future the European energy market needs tailor madepan-European regulation and supervision.

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Thank you very much for your attention!