1. Introduction

Interconnector congestion revenue governance concerns the legal and regulatory rules governing the money generated when an electricity interconnector becomes congested and electricity flows from a lower-price market into a higher-price market. Congestion occurs when the available transfer capacity of an interconnector is insufficient to accommodate all economically desired electricity trades.

For example, if electricity costs €40/MWh in State A and €80/MWh in State B, but the interconnector can transfer only 1,000 MW, the price difference creates congestion revenue. If 1,000 MWh is transferred, the theoretical congestion rent is:

(€80 − €40) × 1,000 MWh = €40,000.

The central legal question is not simply who receives this money, but how it may lawfully be collected, held, allocated, invested, redistributed, and audited.

Modern electricity law generally treats congestion revenue as a regulated resource associated with scarce transmission capacity rather than ordinary commercial profit.

2. Meaning of Interconnector Congestion Revenue

An interconnector is a transmission facility linking two electricity systems, jurisdictions, bidding zones, or countries.

Congestion revenue—often called congestion rent—arises principally from the difference between electricity prices at the two ends of a constrained interconnector.

A simplified formula is:

CR=(Pimport−Pexport)×ECR = (P_{import}-P_{export}) \times E

Where:

CR = congestion revenue;

Pimport = electricity price in the importing market;

Pexport = electricity price in the exporting market; and

E = electricity transferred across the congested interconnector.

In actual electricity markets, the calculation can be more complex because of losses, redispatch, countertrading, loop flows, capacity allocation methods and balancing arrangements.

3. Why Governance Is Necessary

Congestion revenue can become substantial where interconnectors connect markets with materially different electricity prices.

Without appropriate governance, several problems may arise:

Transmission operators may treat congestion revenue as ordinary corporate income.

Consumers may not receive the benefit of efficient interconnection.

Network operators may have incentives to preserve congestion.

Cross-border disputes may arise concerning ownership of the revenue.

Revenue may be used for purposes unrelated to transmission infrastructure.

Double recovery from network users may occur.

Regulators may have difficulty determining whether revenues were properly applied.

Consequently, congestion-revenue governance combines energy regulation, tariff regulation, competition law, financial accountability and cross-border regulatory cooperation.

4. European Union Legal Framework

The clearest developed legal framework is found in European Union electricity law.

The principal modern framework is Regulation (EU) 2019/943 on the internal market for electricity.

The EU model is important because it expressly regulates the use of revenues arising from congestion management.

The basic principle is that revenues resulting from the allocation of interconnection capacity should not simply become unrestricted profits of transmission system operators.

The framework connects congestion revenue with:

maintaining or increasing cross-zonal capacity;

ensuring availability of allocated capacity;

coordinating transmission investments; and

reducing network constraints.

This represents a shift from viewing congestion merely as a market phenomenon to treating its revenues as part of the governance of the transmission system.

5. Revenue Allocation Hierarchy

A central governance principle is that congestion income should generally be directed toward objectives connected with the electricity network.

The EU framework establishes priorities concerning the use of congestion revenues, including:

A. Guaranteeing the availability of allocated capacity

Revenue can be used to ensure that cross-zonal capacity allocated to market participants remains available.

This is important because a market participant purchasing transmission capacity expects that capacity to be delivered.

If an interconnector repeatedly becomes unavailable after capacity has been allocated, questions arise regarding:

compensation;

reliability;

contractual obligations; and

regulatory accountability.

B. Maintaining or increasing cross-zonal capacity

Another important purpose is maintaining or increasing interconnection capacity.

This may involve:

reinforcement of existing interconnectors;

upgrading substations;

replacing transmission equipment;

increasing thermal capacity;

improving control systems; and

removing physical bottlenecks.

The principle is economically significant because congestion revenue can be reinvested to reduce the very constraint that generated the revenue.

C. Network investment

Where congestion revenues cannot appropriately be used for the first-priority purposes, the regulatory framework can permit their application toward network investments that contribute to reducing congestion.

This establishes a connection between:

congestion → revenue → network investment → increased capacity → reduced congestion.

The objective is therefore not necessarily to eliminate every price difference immediately, but to prevent congestion revenues from becoming an unjustified permanent income stream.

6. Who Governs Congestion Revenue?

Congestion revenue governance generally involves several institutions.

6.1 Transmission System Operators

TSOs operate the interconnector and transmission system.

Their responsibilities can include:

calculating or receiving congestion revenues;

maintaining records;

ensuring transparent accounting;

coordinating capacity allocation;

implementing regulatory decisions; and

reporting revenues to regulators.

A TSO should not normally be regarded as having unrestricted proprietary freedom over congestion revenue merely because the money passes through its accounts.

6.2 National Regulatory Authorities

National energy regulators supervise TSOs and determine whether congestion revenues are being used consistently with applicable law.

Their functions may include:

approving investment plans;

monitoring TSO revenues;

reviewing network tariffs;

investigating improper revenue use;

requiring regulatory accounts;

imposing corrective measures; and

coordinating with neighbouring regulators.

6.3 ACER

At the EU level, the Agency for the Cooperation of Energy Regulators (ACER) provides an important institutional framework for cross-border electricity regulation.

ACER becomes particularly relevant where national regulatory decisions have cross-border effects or where coordinated regulatory action is required.

6.4 European Commission

The European Commission provides the broader legislative and competition-law framework within which cross-border electricity markets operate.

The Commission may also become relevant where:

State aid issues arise;

EU internal-market rules are implicated;

national measures affect cross-border trade; or

infringement proceedings concern EU electricity legislation.

7. Congestion Revenue and Tariff Regulation

A major governance issue is whether congestion revenue should reduce network charges.

Suppose a TSO receives substantial congestion revenue. If it were allowed to retain all of that revenue while simultaneously recovering the full cost of the interconnector through network tariffs, consumers could potentially face double recovery.

Regulatory accounting therefore becomes important.

The regulator may ask:

What costs generated the revenue?

Who financed the interconnector?

Has the TSO already recovered its regulated return?

Was the congestion revenue included in tariff calculations?

Was the revenue reinvested?

Did the investment increase available capacity?

Are consumers receiving an appropriate benefit?

Thus congestion revenue governance is closely connected with cost-of-service regulation and incentive regulation.

8. Congestion Revenue and Market Coupling

Modern European electricity markets increasingly use market coupling.

Market coupling allows electricity markets to be coordinated so that available interconnector capacity is allocated alongside energy transactions.

Consider:

The theoretical congestion rent is:

(90−50)×500=€20,000(90-50)\times500 = €20,000

This revenue arises because the interconnector allows cheaper electricity to flow toward the higher-price zone.

Consequently, congestion revenue is partly a market-design outcome, rather than simply a charge imposed by the TSO.

9. Governance of Revenue Under Flow-Based Market Coupling

In interconnected European systems, physical electricity flows do not necessarily follow the contractual path chosen by traders.

Electricity follows the laws of physics, creating:

loop flows;

parallel flows;

internal network constraints; and

cross-border externalities.

Flow-based market coupling attempts to incorporate physical network limitations into market allocation.

This complicates congestion-revenue governance because regulators must determine:

which network constraint generated the revenue;

which TSOs should receive it;

how revenue should be accounted for;

how cross-border costs should be allocated; and

whether investment should address the underlying constraint.

Thus governance cannot always rely on a simple bilateral model of "country A versus country B."

10. Congestion Revenue and Cross-Border Cost Allocation

Interconnector infrastructure frequently produces costs and benefits in multiple jurisdictions.

Suppose an interconnector is jointly used by three electricity markets.

Its congestion revenues may arise from price differences among those markets, while its investment costs may be borne by:

one TSO;

several TSOs;

network users;

taxpayers;

investors; or

a combination of these.

This creates a cross-border cost-allocation problem.

Regulators therefore need to distinguish between:

Revenue allocation

Who receives congestion revenue?

Cost allocation

Who pays for the infrastructure?

Benefit allocation

Who receives the economic benefits?

These three questions need not have identical answers.

11. Transparency and Accounting Requirements

Effective governance requires transparent records.

A regulated TSO should be able to demonstrate:

total congestion revenue received;

source of the revenue;

calculation methodology;

expenses deducted;

amounts invested;

amounts returned to consumers where applicable;

amounts carried forward;

projects financed from congestion revenue; and

regulatory approval supporting each use.

This prevents congestion revenue from becoming an opaque financial stream.

Auditing can therefore form an important component of regulatory governance.

12. Competition-Law Dimension

Congestion can create market power.

Suppose an operator controls scarce cross-border transmission capacity and benefits financially when the interconnector remains congested.

A potential regulatory concern is whether the operator has an incentive to:

restrict capacity;

delay investment;

favour particular market participants; or

manipulate transmission availability.

This creates a potential interaction between energy regulation and competition law.

The governance framework should therefore separate:

ownership of infrastructure + operation of infrastructure + market allocation + regulatory oversight.

13. Case Law

13.1 Case C-17/03 — VEMW and Others v Directeur van de Dienst uitvoering en toezicht energie

The VEMW litigation concerned access to electricity transmission capacity and the compatibility of national allocation arrangements with EU electricity-market rules.

The Court of Justice of the European Union examined issues concerning preferential access and the functioning of the electricity internal market.

Significance

The case illustrates the fundamental EU principle that cross-border electricity transmission capacity cannot simply be governed according to national preferences where those arrangements interfere with the internal electricity market.

For congestion-revenue governance, the broader lesson is that:

scarce interconnection capacity must be administered consistently with transparent and non-discriminatory market-access principles.

13.2 Case C-439/06 — Citiworks AG v Flughafen Leipzig/Halle GmbH

In Citiworks, the Court of Justice considered the scope of electricity-network regulation and third-party access.

The judgment reinforced the importance of regulated access to electricity networks.

Relevance

Although the case was not principally a congestion-revenue case, it is important because congestion revenues arise within a regulated transmission-access environment.

The legal principle supports the proposition that network operators cannot exercise unrestricted control over access arrangements where EU electricity-market rules apply.

13.3 Case C-439/08 — Vlaamse Elektriciteitsbedrijf NV (VEB) v Vlaamse Reguleringsinstantie voor de Elektriciteits- en Gasmarkt

The Court addressed issues relating to electricity-market regulation and cross-border electricity arrangements.

Relevance

The case demonstrates the importance of distinguishing national regulatory authority from the broader requirements of the EU internal energy market.

This is particularly relevant to interconnectors because national regulators must exercise their powers while respecting cross-border market obligations.

13.4 Case C-17/03 — VEMW and Others: Capacity Allocation Principle

The VEMW judgment is particularly relevant to congestion because scarce interconnector capacity must be allocated under rules consistent with EU market principles rather than through arbitrary national preferences.

The underlying principle can be expressed as:

scarce capacity → transparent allocation → non-discriminatory access → regulated revenue consequences.

Thus, congestion revenue governance cannot be separated from capacity-allocation governance.

14. Case Law on Regulatory Independence

European energy-law jurisprudence has also developed important principles concerning the independence and responsibilities of national regulatory authorities.

The EU electricity directives require regulators to possess sufficient authority to:

monitor network operators;

regulate tariffs;

supervise market functioning;

enforce network rules; and

protect consumers.

This is important for congestion revenue because a revenue-allocation framework is ineffective if the regulator cannot independently verify how the money is being used.

15. United Kingdom Perspective

The UK provides another important example of interconnector governance.

The UK electricity market has multiple interconnectors linking Great Britain with systems such as:

France;

Belgium;

the Netherlands;

Ireland; and

Norway.

The regulatory structure involves institutions such as:

Ofgem;

the UK government;

system operators;

interconnector owners; and

European counterparties where applicable.

Congestion revenues may arise from differences in electricity prices between interconnected markets.

Following Brexit, the legal architecture of cross-border electricity trading has become more institutionally complex, particularly concerning market coupling and trading arrangements.

16. Indian Perspective

India's electricity system does not have international interconnectors comparable in scale and legal structure to European cross-border electricity markets. However, the underlying governance principles are relevant to inter-State transmission congestion.

The principal legal framework includes:

the Electricity Act, 2003;

Central Electricity Regulatory Commission regulations;

Grid Code requirements;

transmission-access rules; and

power-market regulations.

The Central Electricity Regulatory Commission (CERC) has extensive jurisdiction over inter-State transmission and electricity-market arrangements.

Although the terminology may differ from the European concept of congestion rent, similar governance questions arise regarding:

transmission constraints;

transmission charges;

market access;

transmission availability;

congestion management; and

allocation of costs and benefits.

17. Indian Case Law

Energy Watchdog v. CERC, (2017) 14 SCC 80

The Supreme Court of India in Energy Watchdog v. CERC considered important questions concerning electricity regulation, regulatory powers and the interaction between contractual arrangements and the statutory regulatory framework.

Although the case did not directly establish a doctrine of "interconnector congestion revenue," it is useful for understanding the broader principle that electricity-sector arrangements operate within the statutory regulatory framework established by the Electricity Act.

Relevance

For congestion-revenue governance, the case supports the broader regulatory proposition that electricity-market arrangements cannot be understood solely as private commercial transactions when statutory regulatory powers apply.

PTC India Ltd. v. Central Electricity Regulatory Commission, (2010) 4 SCC 603

This Supreme Court decision is particularly important for Indian electricity regulation.

The Court considered the relationship between:

the Electricity Act;

regulations made by CERC; and

market participants.

Significance

The case establishes the importance of properly distinguishing regulations made under statutory authority from administrative directions.

For congestion governance, this is relevant because rules concerning:

transmission access;

congestion management;

market operation; and

charges

must have an appropriate statutory and regulatory foundation.

18. Key Governance Principles

A comprehensive interconnector congestion-revenue framework should contain at least eight principles.

1. Legal certainty

The legal basis for collecting and using congestion revenue must be clearly established.

2. Transparency

Revenue calculations and uses should be publicly auditable.

3. Non-discrimination

Market participants should not be selectively favoured.

4. Consumer protection

Revenue should ultimately contribute to efficient and reliable electricity markets rather than becoming unjustified operator profits.

5. Network efficiency

Where appropriate, congestion revenues should support measures that reduce transmission constraints.

6. Regulatory independence

Regulators must be able to examine TSO revenue accounts independently.

7. Cross-border coordination

Neighbouring regulators should coordinate where revenue arises from jointly operated infrastructure.

8. Accountability

TSOs should be required to explain how congestion revenue has been used.

19. Major Legal Challenges

A. Who owns congestion revenue?

One of the most fundamental questions is whether the revenue legally belongs to:

the TSO;

consumers;

the transmission system;

the states involved; or

another regulated entity.

Modern regulatory frameworks generally avoid treating congestion revenue as unrestricted corporate property.

B. Should congestion revenue reduce tariffs?

If congestion revenue is substantial, regulators must decide whether it should:

reduce transmission charges;

finance network investment;

fund reliability measures;

be carried forward; or

be allocated according to statutory rules.

C. What happens when congestion persists?

Persistent congestion may indicate insufficient infrastructure.

The regulator therefore needs to distinguish between:

efficient scarcity and avoidable structural congestion.

Where congestion is avoidable, retaining large congestion revenues without addressing the underlying constraint may create undesirable incentives.

D. Who bears interconnector investment risk?

A new interconnector may cost billions while future congestion revenue is uncertain.

Investment governance therefore requires decisions concerning:

regulated returns;

merchant investment;

public financing;

guarantees;

capacity contracts;

revenue-sharing arrangements; and

stranded-asset risk.

20. Governance Model

A simplified governance structure can be represented as:

Electricity Market

↓

Interconnector Capacity Allocation

↓

Congestion

↓

Congestion Revenue

↓

TSO Accounting

↓

National Regulatory Authority

↓

Regulatory Review

↓

Permitted Uses

→ Capacity maintenance
→ Capacity expansion
→ Network investment
→ Reliability measures
→ Consumer/tariff benefits where legally permitted

This creates a regulatory feedback loop rather than allowing congestion revenue to become an uncontrolled financial surplus.

21. Emerging Issues

Future congestion-revenue governance will increasingly involve:

Renewable energy

Wind and solar generation can produce large geographical price differences, increasing the importance of interconnection.

Offshore grids

Multi-terminal offshore networks may connect several countries simultaneously, making bilateral revenue allocation increasingly difficult.

Energy storage

Storage can reduce congestion by shifting electricity across time.

Hydrogen

Electricity interconnectors may increasingly interact with hydrogen production and integrated energy systems.

Digital grids

Advanced monitoring and automated capacity allocation will require new rules concerning data, algorithms and market transparency.

Climate change

Extreme weather may increase transmission outages, raising questions about whether congestion revenue should support resilience investment.

22. Conclusion

Interconnector congestion revenue governance is fundamentally concerned with ensuring that the economic value created by scarce cross-border transmission capacity is managed in the public regulatory interest.

The central legal principles are:

congestion revenue must have a clear statutory/regulatory foundation;

its calculation should be transparent;

TSOs should not necessarily enjoy unrestricted proprietary control over it;

regulators should supervise its collection and use;

revenues should generally be connected to maintaining, increasing or efficiently using transmission capacity;

cross-border revenues require cooperation between regulators;

tariff recovery must avoid unjustified double recovery; and

competition and non-discrimination principles must be preserved.

The European Union provides the most developed legal model, particularly through its electricity-market regulations governing the use of congestion revenues. Cases such as VEMW, Citiworks, and Indian decisions such as PTC India v. CERC and Energy Watchdog v. CERC illustrate the broader legal principles of regulated network access, statutory regulatory authority and electricity-market governance.

Ultimately, effective congestion-revenue governance seeks to transform scarcity-generated revenue into a mechanism for efficient network management, investment, reliability and accountable electricity-market regulation, rather than allowing congestion itself to become an uncontrolled source of regulated-operator income.