German regulator formally rejects request from Nord Stream 2 for EU law waiver

London — The German energy regulator Bundesnetzagentur on Friday formally rejected an application from the developer of the Nord Stream 2 gas pipeline to be exempted from new EU rules on non-EU gas links.

The Gazprom-owned Nord Stream 2 development company in January asked the regulator Bundesnetzagentur for a derogation from the EU's amended gas directive rules, which came into effect in May 2019.

Such a derogation would have allowed the German section of the 55 Bcm/year pipeline from Russia to be exempted from third-party access and unbundling rules, and requirements on transparent tariffs.

"The Bundesnetzagentur has today rejected the application of Nord Stream 2 for a derogation from regulation for the section of the Nord Stream 2 pipeline located in German territory," it said in a statement.

The agency sent notification of its planned decision to interested parties earlier this month for comment, but made the ruling official on Friday.

It said that derogations from the regulatory requirements of the amended directive could only be awarded for pipelines completed before May 23, 2019.

"Since the Nord Stream 2 pipeline had not been fully laid by May 23, 2019, the Bundesnetzagentur has rejected the application for derogation made by Nord Stream 2," it said.

"When it is put into operation, therefore, Nord Stream 2 will be subject to German regulatory requirements and European rules on unbundling, network access and cost regulation."

Nord Stream 2 had argued that the pipeline was "economically" complete before the amended EU gas directive came into effect as it had made investments worth billions of euros under the existing legal framework.

"We await receiving the official decision and will then evaluate it and consider further actions to preserve our rights, including appealing this decision in the German courts," a Nord Stream 2 spokesman said Friday.

"The appeal is possible within one month following the decision," he said.

'Completion' meaning

The crux of the issue came down to the parties' definition of the pipeline's "completion."

The regulator said that its responsible ruling chamber understood the term "completion" in a constructional/technical sense, while Nord Stream 2 believed it to mean completion in an economically functional sense, referring to the investment decision which was made well before May 2019.

It said that all EU member states had had the opportunity to examine Nord Stream 2's application and to submit a response.

It said responses to the consultation were taken into account in the decision, as was the joint statement submitted by Poland's PGNiG and its trading subsidiary, which were summoned to the proceedings upon application in March.

"Neither any of the member states nor the parties summoned shared the viewpoint of Nord Stream 2 as regards the term 'completion'," the regulator said.

This means the German government itself -- a political supporter of the pipeline -- did not say that it agreed with Nord Stream 2's definition.

Germany transposed the amended EU gas directive into national law in December last year.

PGNiG, in a reaction statement Friday, welcomed the ruling which it said meant Nord Stream 2 would not be allowed special treatment.

PGNiG had argued that Nord Stream 2 would damage security of supply and competition in the gas market in Central and Eastern Europe.

"[The decision] confirms the strength of our arguments against excluding Nord Stream 2 from the application of EU regulations," CEO Jerzy Kwiecinski said in a statement.

"From the beginning, we believed Nord Stream 2 cannot be privileged. Like the Polish government, we are still of the opinion that the Nord Stream 2 project carries negative consequences for security of supply and competition on the gas market in Central and Eastern Europe," Kwiecinski said.

Poland's deputy prime minister Jacek Sasin said Warsaw "strongly opposes all monopolistic practices of foreign companies and attempts to divide European customers into better and worse."

"Today's decision of the German regulator is proof of the effectiveness of our energy policy," Sasin said.

PGNiG added that it would monitor the further course of the case, including possible appeals initiated by Nord Stream 2.

Legal challenges

Nord Stream 2 had said investments of Eur5.8 billion ($6.3 billion) had already been made irrevocably before the amended directive took effect, while the pipelay in the German territorial waters was already complete at the end of 2018.

Just 160 km (99 miles) of Nord Stream 2 are left to lay in Danish waters out of the total 2,460 km length of the pipeline, with Russian President Vladimir Putin earlier this year saying he expected the pipeline to come online by Q1 2021 at the latest.

The Nord Stream 2 spokesman said Friday that the company continued to maintain that on the effective date of May 23, 2019, the pipeline had been completed from the perspective of economic functionality.

He said that the rejection of the application for a derogation "exposes the discriminating effect of the amended EU Gas Directive."

Nord Stream 2 also continues to look to have the amendments in the gas directive canceled.

It began arbitration proceedings in September in a bid to force the EU to annul changes to the directive, having already asked the EU's General Court in July last year to annul what it called "discriminatory" changes.

"The ongoing procedures serve the purpose of clarifying the applicable rules for the operation of Nord Stream 2," the spokesman said.

"The need for clarification has been caused by the enactment of an unlawfully discriminating amendment to the EU Gas Directive, and by the absence of an impact assessment which the European Commission is normally obliged to provide for any new legislation," he said.

Arbitration cases such as that launched by Nord Stream 2 have an average duration of 2-4 years, while Nord Stream 2's separate appeal to the EU's General Court was expected to take 20 months to reach its conclusion.