Andris Piebalgs European Commissioner for Energy

PMCOMM: Commissioner Piebalgs, first and foremost allow us to thank you for taking the time to meet with us on such an eventful day. Please share your evaluation of how smoothly things went with the readers of The Sunday Telegraph.

COMMISSIONER PIEBALGS: I think we should look at the day within an overall context. I recall the two main focuses of the Prodi Commission whilst I was posted in Brussels as Ambassador. The think tanks at the time made it clear there were two directions to be taken as regards external policy; enlargement towards the East or towards the Baltic countries. The Prodi Commission chose the Baltic option, but also planned to advance with the Eastern expansion which is now bearing fruit.

In many ways, the Balkan states were not really top priority for the Prodi Commission but had always been an outstanding issue.

However, the Balkans have definitely come of age. It is a region full of challenges and cooperation is lacking. The energy sector suffers developmental issues with its borders as a primary detriment. To this effect, this particular project is of key interest, as energy will create sustainable development in the region, not only economically, but politically as well. Needless to say a difficult task, as Kosovo and Serbia-Montenegro and some other aspects have always been issues, but we believed that Greece was to be key in this initiative as they could guide us and avoid some foreseeable political difficulties. Greece was also best placed to do so as they have a vested commercial interest in the region, which compliments their political stance and in turn serves as a starting point for the region. Essentially, Greece stands to benefit from the development of its neighbouring countries as it grows. Without the growth of the region, Greece's growth is also at stake. As a result, Greece and the region will enjoy diversification of supplies and sources. In this sense the treaty is highly beneficial, as we see interesting advances coming to the EU via Turkey, the Caspian basin, Egypt or Iraq and its gas, for example.

The challenge was to find the legal form where all the countries would wish to participate whilst discovering what the EU position was to be. As for the EU the situation is slightly complex: the countries situated further a field support the treaty as it is relatively convenient for them to do so, whereas the countries bordering the new community such as Slovenia or Italy have been more hesitant as they are directly exposed to this new energy community. As a result, there has been a lot of fine-tuning and the EU succeeded in finding a regulatory regime that allows it to hold a common and satisfactory position within.

Summarizing, and as a first point, I believe the project will foster political stability in the region whilst allowing the EU to boost the current level of their relations.

Secondly, from an economic standpoint, the treaty is expected to bring much needed investment to the region and I would like to thank the big international donors such as The World Bank, who announced one billion upon the signing of the treaty. This is definitely a wonderful developmental tool for the countries involved.

And thirdly, I genuinely expect the diversification of supply to be crucial. Regional transit pipelines and new energy sources will solve many problems. Some of the countries involved have gas prices that defy belief as limited supply results in higher prices.

PM COMMUNICATIONS: May I ask as to what are your aspirations for the environmental impact of a better distribution system?

COMMISSIONER PIEBALGS: Indeed, environmental challenges are the biggest ones. So first of all, I think it is better to start doing things right from the beginning or at least early enough, and not wait until the accession negotiations and then try to push and implement the environmental legislation at high speed.

Furthermore, making it even more urgent at an early stage is the climate change. The fight against climate changes plays a particular role in the EU energy policy and it reflects in the emission trading mechanisms. It has a very strong influence on the development of the energy sector and within a future common energy market it constitutes another part of the market, which in turn can cause perturbations, and it is unclear who would benefit at the end of the day. At this stage we have transitional arrangements that have been given to particular countries from South East Europe and at least all investors know what will be the conditions by 2025. With long-term stability in mind, we aim to make sure there is enough time at hand for everyone to adhere to the requirements of the environmental directives.

PM COMMUNICATIONS: In today's press conference, you were very complimentary to Minister Sioufas and his ministry for the amount of time and energy they've put into this treaty. If we analyse Greece's role in this event, do you think this could serve as a blueprint for other areas of cooperation, considering it is within our editorial focus to highlight how Greece is a perfect tool for development in the region?

COMMISSIONER PIEBALGS: Greece has been the main facilitator. This treaty has its own framework; a regulatory office in Athens, the secretariat based in Vienna and the information office in Sofia and as a result this falls into a much broader context. Effectively, Greece has carried out an exhaustive labour in terms of facilitating the treaty, but now its up to the treaty to really work. Greece should and will have a particular role in various projects of particular interest to its needs such as the Burgas-Alexanroupolis oil pipeline. But there will be other projects where Greece may not necessarily participate, and other countries will be involved. The Greek government has been fundamental in its role as facilitator and creating the conditions but now it's up to the investors to decide and they could be Greek or elsewhere. Although it is worth noting that the Greek business community has superior regional market-knowledge and as a result will enjoy competitive advantages in terms of future business in the area.

PM COMMUNICATIONS: With the advent of the large tried & tested European players such as Vatenfall, EON, RWE and EDF looking towards the newly created market currently manned by smaller locals players, how do you envision the region's future competitiveness? Will we see big players from the EU25 or even EU15 dominate the market or will the local players be able to stand up to competition?

COMMISSIONER PIEBALGS: In terms of one giant Balkan energy company emerging as a result, I somehow cannot see it happening. However, manufacturing has always been strong in the region and the sector's development will clearly benefit the energy sector's development as a result of an increase in manufacturing services.

Energy trade in the region is highly dependent on the interconnection between countries. Further investments are to be made to improve the trade in electricity and it currently only stands at 10%, which is unfortunate. Even within today's EU market there is a tremendous need to develop the interconnection infrastructure and I expect it to take some time here as well.

As regards the EU15, I would actually include the whole EU 25 in this particular example, as Czech companies for example are quite aggressive. Nonetheless, the market works in its own particular way and ultimately it will decide. Market development will determine strong competition and that stronger will survive. The concerned governments will play an important role in this in regards to their privatisation policies.

A regulatory framework is required. According to the EU legislation we have a regulatory authority for each participating country and then we are responsible for the coordination of these authorities. As a result, it is very difficult to predict what will happen in the future. I think there will probably be a series of take-overs, and not necessarily from EU 25. I would be quite happy to see takeovers involving one country of the Treaty to another. I think this strengthens the market.

Regardless of all these factors, its clear that local governments should pay particular attention to their interconnection capacity as, in my opinion, its not necessarily important who is taking over the energy service, because what really counts is the actual level of service of the energy in question, irrespective of the company.

Interconnectivity is vital to avoid problems such as the Pyrenees pipeline between France and Spain that commenced in 1982 and today, in the year of 2005 still isn't finished! As long as this line is incomplete, the Iberian market will be isolated and will suffer as result of this lack of generating capacity as its consumption grows. They may even face the threat of blackouts as has happened in Italy.

The good news was these blackouts promoted huge necessary investments and improvements in interconnection lines in Italy. I hope we do not require blackouts to attract investment here!

PM COMMUNICATIONS: How would you define the ideal investor in this new era given the region's requirements? What criteria should they possess?

COMMISSIONER PIEBALGS: This particular region really needs a defined strategy for medium and long term. So, to this effect, I would say the level of investment. Following this, it is important to keep in mind the social issues, that is to say the restructuring of companies and how employees would be treated. This is really a very important point as unemployment in the region is remarkably high. All this combined with a high level of committal to cross-border trade with neighbouring countries. These are the characteristics I would look for, but it is up to each country to decide for itself.

Generation is key and allowing competition in this area is crucial. There is a real need to create the necessary conditions for new independent generators to enter the market and accessing the grid. Transmission systems should be accessible for all parties involved without any hampering of the third party access. The same idea should be applied to the distribution network.

I believe there are basic rules, and countries that have abided by these rules have created good markets. In a best-case scenario, I foresee this market functioning like the Nordic countries, where the competition is stiff but the prices are stable for the long term and customers are satisfied with the service. From the regional point of view this is the best example we have to work with.

At the end of the day, a truly free and beneficial market, to both supplier and end user, will depend on the level of investments and interconnections.

PM COMMUNICATIONS: Commissioner Piebalgs, on behalf of my colleagues and I allow me to express my gratitude for the interview just held.

COMMISSIONER PIEBALGS: You're most welcome.