Memorandum among Energy Market Inspection of the Republic of Estonia, Public Utilities Commission of the Republic of Latvia and National Control Commission for Prices and Energy of the Republic of Lithuania concerning the Common Baltic Electricity Market

Preambule

The Signatories to this Memorandum,

Having regard commitments of the Republics of Estonia, Latvia, and Lithuania to comply with the European Union (EU) legal acts upon accession to the EU as Member States subject to the transition periods provided in each of the Accession Agreements,

Recalling the Agreement among the Ministry of Economic Affairs of the Republic of Estonia, Ministry of Economics of the Republic of Latvia and Ministry of Economy of the Republic of Lithuania on Co-operation in the Energy Sector, signed in Riga, 29 October 1998, and the Resolution of the Prime Ministers of the Republic of Lithuania, the Republic of Latvia and the Republic of Estonia signed in Visaginas on 26 June 2002,

Acknowledging the importance of the open electricity market for the competition, access to energy transport facilities, as well as security of electricity supply,

Wishing to further strengthen a clear and coherent set of inter-BALTIC electricity market rules and principles promoting secure, efficient, uninterrupted and unimpeded cross-border trade of electricity as a means of promoting economic growth and security of electricity supply of all Signatories,

Desiring to further liberalize the existing regimes of the Signatories relating to electricity trade,

Wishing to develop further stable, equal, fair, favourable, objective, non-discriminatory and transparent Common Baltic Electricity Market conditions,

Following findings and recommendations of Forum of the Baltic Regulators and Transmission System Operators regarding development of preconditions of Common Baltic Electricity Market,

Have agreed as follows:

I. Definitions

‘Signatory’ means an authorized Energy Sector Regulatory Authority of the Republics of Estonia, Latvia and Lithuania.

‘Common Baltic Electricity Market’ or ‘CBEM’ shall mean all activities in the generation, transmission, distribution and supply of electricity by the market participants in the Market Area.

‘Participants of the Common Baltic Electricity Market’ shall mean all legal or natural persons holding a license or having the license-free right for the generation, transmission and/or distribution, supply of electricity and/or all eligible customers, which are defined by the national legislation of the respective State.

‘Market Area’ shall mean the combined territory of the Republic of Estonia, the Republic of Latvia and the Republic of Lithuania.

II. Goals

The goals of this Memorandum are:

1. To ensure Third Party access by:

1.1. avoiding discriminatory treatment of cross-border transactions;

1.2. ensuring fair allocation of limited network capacity (when this is the case);

1.3. d esigning access rules to enable any supplier or any eligible customer to contract with any producer;

2. To regulate the pricing of services with:

2.1. complete recovery of transmission and distribution network related costs, including the cost of the ancillary services, network extension and development;

2.2. cost reflection in order to give efficient economic signals;

2.3. market based mechanisms for congestion management;

3. To develop CBEM seeking to avoid:

3.1. artificially low or high network prices to customers or certain groups of customers;

3.2. limitation for eligible customers to buy from competitive suppliers;

3.3. presence of non-creditworthy market participants;

4. To ensure the separation of accounts of the core activities from other functions of the Transmission System Operator (TSO) within given authorisation of national legislation;

5. To encourage the justified investments avoiding non-justified barriers to trade;

6. To abolish the cross-subsidy, discrimination, abuse and other obstacles for the competition in the Market Area;

7. To harmonise the principles of electricity pricing in the market area;

8. To provide sufficient effort to guarantee needed quality of service and security of electricity supply in the long term;

9. To ensure the availability of service for all customers.

III. Pricing and payment

Signatories shall realise the below stated provisions:

1. Customers pay for electricity transmission and/or distribution services only to the national transmission and/or distribution system operators.

2.Electricity transmission and distribution service tariffs could be different in each country.

3. National transmission tariffs shall cover domestic transmission costs and the costs of ancillary services, if it is not in contradiction with the national law of the Signatory concerned.

4. The Transmission System Operators shall compensate each other additional network losses caused by cross-border electricity flows in the Market Area according to a set methodology established by an agreement among the TSOs.

5. Producers, when supplying electricity, shall not pay for the transmission and/or distribution services.

6. The ancillary services shall be provided by the national TSOs, taking advantage from the joint operation of the Interconnected Power Systems.

7. The Signatories shall co-operate to harmonise the balance energy pricing and the settlement principles in the Market Area.

8. Balance energy price and the settlement principles for the CBEM participants shall be formed in the way, that it provides right incentives to the market participants.

9. Market participants, who breached their balance, shall pay for balance energy to the national TSO in the manner established by the national law.

10. Suppliers, importing electricity, shall pay a share equal to the local suppliers of the costs of the public service obligations only of the respective State, in which they sell, if it is not in contradiction with the national law of the Signatory concerned.

11. The Signatories shall co-operate to harmonise licensing provisions in the market area.

12. The Signatories are aware of the need of informing each other of the subsidies, which exist within the CBEM.

13. The list of the eligible customers in CBEM shall be published on the web sites www.eti.gov.ee, www.sprk.gov.lv and www.regula.is.lt and/or in the national state newspapers.

IV. Applicability

1. The provisions of this Memorandum shall apply equally to all Signatories.

2. The Memorandum shall apply only to the scope of activities given within the authorisation provided in the national law of each of the three Signatories.

V. Final provisions

1. This Memorandum becomes effective on the day it is signed.

2. This Memorandum is concluded for the indefinite time.

3. This Memorandum may be amended, supplemented or terminated at any time by any of the Signatories, subject to a period of not less than two months’ by the written notification to other Signatories .

4. This Memorandum may be amended and supplemented in written by the Signatories.

5. Once this Memorandum is terminated by one of the Signatories, the document remains effective to other two Signatories.

6. This Memorandum is made and signed in English in three originals, each of which has equal legal validity.

Place and Date: Vilnius, 4 November, 2002