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Distribution System Operators (DSOs)
European Union Electricity Market Glossary





Distribution System Operators (DSOs) in the European Union Internal Electricity Market are responsible for providing and operating low, medium and high voltage networks for regional distribution of electricity as well as for supply of lower-level distribution systems and directly connected customers (Articles 2 and 25 of Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC).


European Energy Regulators’ White Paper # 2, The Role of the DSO, Relevant to European Commission’s Clean Energy Proposals of 15 May 2017 observes DSOs operate local electricity networks, traditionally distributing electricity from the higher-voltage transmission network and from small generators into homes and businesses, similar to regional/local roads on the road network.


The aforementioned White Paper of 15 May 2017 stresses that DSOs are typically natural monopolies, overseen by energy regulators to ensure that they deliver value for money to consumers.


According to Article 2(6) of the said Directive 2009/72/EC, 'Distribution System Operator' is 'a natural or legal person responsible for operating, ensuring the maintenance of and, if necessary, developing the distribution system in a given area and, where applicable, its interconnections with other systems and for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity.'


This definition is left unchanged by the so-called 'Winter Energy Package' proposed by the European Commission in December 2016.


Besides the regional distribution and supply task it is also the DSOs' responsibility to ensure the security of their networks with a high level of reliability and quality.


The thresholds, which determine whether a system is a transmission system or a distribution system, are established at the national level (Recital 9 of the Network Code on Demand Connection (DCC)).


The DSO's category is characterised by an extensive heterogeneity across the EU Member States - in some Member States there are hundreds of DSOs, in other countries there might be only one or two.


A sub-set of the DSOs' generic category are Closed Distribution System Operators (CDSOs).



DSO separation - unbundling rules



There are different levels of DSO separation, the main types of unbundling being: accounting, functional, legal and ownership separation.


- Full ownership unbundling (ownership separation) is where the DSO is a separate company to any interests in generation or supply;



"DSOs need to facilitate new arrangements by acting as neutral market facilitators with the interest of the IEM at the forefront. This requires a sufficient level of unbundling between suppliers and associated DSOs. With the increasing penetration of distributed (including RES-based) generation, DSOs will be called to manage their systems in a more active way, similarly to TSOs, including by taking responsibility for managing congestions using local resources connected at the distribution level (with DSR among them). Therefore, the cooperation between DSOs and TSOs should be enhanced. Moreover the same level of separation of DSO functions from other activities, as envisaged for TSOs, should be considered. Exceptions could be maintained for very small DSOs, which are unlikely having to perform TSO-like functions. In this respect, we suggest significantly reducing the current de minimis threshold"


(Joint ACER-CEER response to European Commission's Consultation on a new Energy Market Design of 7 October 2015, p. 20, 21)


- Legal unbundling is where the DSO is a legally separate entity with its own independent decision making board, but remains within the umbrella of a Vertically-Integrated Undertaking (VIU).


- Functional or management unbundling is where the operational, management and accounting activities of a DSO are separated from other activities in the VIU; and


- Accounting unbundling is where the DSO business unit must keep separate accounts for its activities to prevent cross subsidisation, from the rest of the VIU.


While full ownership unbundling is considered to be the strongest model for the independence of the DSO, the other models can also ensure transparent and independent decision making and equal treatment of all DSO stakeholders, as long as sufficient ringfencing and regulatory monitoring and oversight are in place.


Status Review on the Implementation of Distribution System Operators' Unbundling Provisions of the 3rd Energy Package, CEER Status Review, Ref: C15-LTF-43-03, 1 April 2016 observes there are in practice different unbundling regimes implemented in the Member States, some DSOs have a separate ownership to suppliers/producers, whereas others are part of a VIU.


Apart from the Netherlands, where full ownership unbundling is required by law, all the other participating Member States require at least a legal and functional unbundling for both gas and electricity DSOs (as far as non-exempted).


In most Member States, national provisions foresee that the DSO branding/communication (i.e. corporate identity) must not create confusion with production and supply activities of the VIU.


The degree of separation (the most effective being the ownership unbundling) from VIUs will influence whether the DSO is allowed to undertake activities that are listed in the „grey‟ area of the framework under certain conditions. The more DSOs engage in flexibility and DSR, the more robust separation is needed, especially if the DSOs also have a role in data management (see: The Future Role of DSOs, A CEER Public Consultation Paper, Ref: C14-DSO-09-03 16 December 2014).


The more responsibility the DSO has, the greater the potential need for further separation of its system operation activities from other competitive activities carried out by other companies of the same VIU (like supply and generation).


More generally, if the DSO takes on new roles, sufficient controls are needed to ensure that DSOs do not use access to data to gain commercial advantage or create market distortions.


It is also useful to add that the unbundling provisions of the 3rd Package constitute a minimum set of rules and the Member States may consider adopting further measures to ensure the effectiveness of unbundling.



De-minimis threshold



Smaller DSOs serving less than 100 000 connected customers can be exempted from the requirements of both legal and functional unbundling.


This is based on Article 26(5) of the Directive 2009/72/EC, which stipulates Member States may decide not to apply paragraphs 1, 2 and 3 [of Article 26] to integrated electricity undertakings serving less than 100 000 connected customers, or serving small isolated systems, similar provision exists in the Gas Directive for gas DSO.


Almost half of the EU Member States have adopted this exemption at national level (the aforementioned CEER Status Review of 1 April 2016, p. 6). 


The number of DSOs with fewer than 100,000 connected consumers varies across Europe.


The above-cited CEER Public Consultation Paper of 16 December 2014 expressed the view that all European customers, whether they are connected to a bundled or unbundled DSO, should be able to benefit from the 3rd Package without discrimination.


If a DSO is carrying out activities identified as „grey areas‟, it should be subject to strict unbundling requirements regardless of whether or not it is subject to the de-minimis rule.


Furthermore, as the role of some DSOs develops into an active grid manager, it may be worthwhile to reconsider the application of the (current) de-minimis rule and if it is still appropriate.


Such review could entail either the adaptation or the decrease of said threshold.



Forward-looking approach



Regulatory bodies consider, with the increasing penetration of distributed (including RES-based) generation, DSOs will be called to play a more active role in the overall management of the electricity system (Joint ACER-CEER response to European Commission's Consultation on a new Energy Market Design of 7 October 2015, p. 28). It is underlined, however, DSOs in Europe are represented by several "associations", not always speaking with one voice.


Therefore, consideration should be given to whether DSOs should be encouraged, or mandated, to establish a single body through which they can more efficiently participate in this process.


Such a single EU DSO body would also facilitate the communication and cooperation with ENTSO-E, whose effectiveness should be improved given the need of a closer relationship between Transmission System Operators (TSOs) and DSOs.


In the same vein goes the Winter Energy Package establishing the EU DSO entity.


DSOs are becoming more important in the electricity sector because many new services and developments are happening at local distribution level.


They include more active customers with varying electricity demand, self-generation, small-scale renewable generation, energy storage, power-to-heat and electric vehicles.


Council of European Energy Regulators (CEER) and ACER advocate that DSOs must act as neutral market facilitators performing regulated core activities and not activities that can efficiently and practicably be left to a competitive market.


Moreover, the above European energy regulators underline transparency of medium-term forecast of network needs/service requirements is essential to enable market-based solutions to be developed.

Therefore, CEER and ACER support the prohibition on DSO ownership/operation of energy storage and electric vehicles’ charging infrastructures in Articles 2, 33, 36 (and 54 for TSOs) of the Proposal for a Directive of the European Parliament and of the Council on the internal market for electricity (recast) on common rules for the internal market in electricity (recast), 30.11.2016, COM(2016) 864 final 2016/0380 (COD).


According to Article 15(1) of the Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing, DSOs, TSOs, balancing service providers (BSPs) and balance responsible parties (BRPs) are required to cooperate in order to ensure efficient and effective electricity balancing.




Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity, Articles 24-27


Article 24
Designation of distribution system operators

Member States shall designate or shall require undertakings that own or are responsible for distribution systems to designate, for a period of time to be determined by Member States having regard to considerations of efficiency and economic balance, one or more distribution system operators. Member States shall ensure that distribution system operators act in accordance with Articles 25, 26 and 27.

Article 25
Tasks of distribution system operators

1.   The distribution system operator shall be responsible for ensuring the long-term ability of the system to meet reasonable demands for the distribution of electricity, for operating, maintaining and developing under economic conditions a secure, reliable and efficient electricity distribution system in its area with due regard for the environment and energy efficiency.

2.   In any event, it must not discriminate between system users or classes of system users, particularly in favour of its related undertakings.

3.   The distribution system operator shall provide system users with the information they need for efficient access to, including use of, the system.

4.   A Member State may require the distribution system operator, when dispatching generating installations, to give priority to generating installations using renewable energy sources or waste or producing combined heat and power.

5.   Each distribution system operator shall procure the energy it uses to cover energy losses and reserve capacity in its system according to transparent, non-discriminatory and market based procedures, whenever it has such a function. That requirement shall be without prejudice to using electricity acquired under contracts concluded before 1 January 2002.

6.   Where a distribution system operator is responsible for balancing the distribution system, rules adopted by it for that purpose shall be objective, transparent and non-discriminatory, including rules for the charging of system users of their networks for energy imbalance. Terms and conditions, including rules and tariffs, for the provision of such services by distribution system operators shall be established in accordance with Article 37(6) in a non-discriminatory and cost-reflective way and shall be published.

7.   When planning the development of the distribution network, energy efficiency/demand-side management measures or distributed generation that might supplant the need to upgrade or replace electricity capacity shall be considered by the distribution system operator.

Article 26
Unbundling of distribution system operators

1.   Where the distribution system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to distribution. Those rules shall not create an obligation to separate the ownership of assets of the distribution system operator from the vertically integrated undertaking.

2.   In addition to the requirements under paragraph 1, where the distribution system operator is part of a vertically integrated undertaking, it shall be independent in terms of its organisation and decision-making from the other activities not related to distribution. In order to achieve this, the following minimum criteria shall apply:

(a) those persons responsible for the management of the distribution system operator must not participate in company structures of the integrated electricity undertaking responsible, directly or indirectly, for the day-to-day operation of the generation, transmission or supply of electricity;

(b) appropriate measures must be taken to ensure that the professional interests of the persons responsible for the management of the distribution system operator are taken into account in a manner that ensures that they are capable of acting independently;

(c) the distribution system operator must have effective decision-making rights, independent from the integrated electricity undertaking, with respect to assets necessary to operate, maintain or develop the network. In order to fulfil those tasks, the distribution system operator shall have at its disposal the necessary resources including human, technical, physical and financial resources. This should not prevent the existence of appropriate coordination mechanisms to ensure that the economic and management supervision rights of the parent company in respect of return on assets, regulated indirectly in accordance with Article 37(6), in a subsidiary are protected. In particular, this shall enable the parent company to approve the annual financial plan, or any equivalent instrument, of the distribution system operator and to set global limits on the levels of indebtedness of its subsidiary. It shall not permit the parent company to give instructions regarding day-to-day operations, nor with respect to individual decisions concerning the construction or upgrading of distribution lines, that do not exceed the terms of the approved financial plan, or any equivalent instrument; and

(d) the distribution system operator must establish a compliance programme, which sets out measures taken to ensure that discriminatory conduct is excluded, and ensure that observance of it is adequately monitored. The compliance programme shall set out the specific obligations of employees to meet that objective. An annual report, setting out the measures taken, shall be submitted by the person or body responsible for monitoring the compliance programme, the compliance officer of the distribution system operator, to the regulatory authority referred to in Article 35(1) and shall be published. The compliance officer of the distribution system operator shall be fully independent and shall have access to all the necessary information of the distribution system operator and any affiliated undertaking to fulfil his task.

3.   Where the distribution system operator is part of a vertically integrated undertaking, the Member States shall ensure that the activities of the distribution system operator are monitored by regulatory authorities or other competent bodies so that it cannot take advantage of its vertical integration to distort competition. In particular, vertically integrated distribution system operators shall not, in their communication and branding, create confusion in respect of the separate identity of the supply branch of the vertically integrated undertaking.

4.   Member States may decide not to apply paragraphs 1, 2 and 3 to integrated electricity undertakings serving less than 100 000 connected customers, or serving small isolated systems.

Article 27
Confidentiality obligation of distribution system operators

Without prejudice to Article 30 or any other legal duty to disclose information, the distribution system operator must preserve the confidentiality of commercially sensitive information obtained in the course of carrying out its business, and shall prevent information about its own activities which may be commercially advantageous being disclosed in a discriminatory manner.





Last Updated on Saturday, 16 June 2018 13:29


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