Energy and functional integration in the Balkans (2001-2007)
In 2001 another ESI report on the future of the Stability Pact, produced under the supervision of Martti Ahtisaari, recommended a process of functional integration on the regional level focusing on energy:
"A concrete proposal is to commit Western donors substantially to increase support to regional governments in reforming their energy sectors in return for a commitment by these governments to create a genuine common market, integrated with that of the European Union… over the medium term, substantial new investments will need to be made throughout the region to satisfy the demand for new energy generation capacity and to replace old capacity. The existence of regional markets and structures for co-operation will determine the viability of such investments… Successful functional integration in the energy sector could provide a model for regional co-operation in other sectors."
In 2002, South East European countries agreed to a European Commission strategy outlining the principles and institutional requirements for a regional electricity market. They then adopted a memorandum, based on the new EU electricity and gas directives from 2003, and signed an international treaty establishing an Energy Community in South East Europe in October 2005.
The treaty, which entered into force on 1 July 2006, mandates far-reaching reforms:
"to create a single regulatory space for trade in Network Energy that is necessary to match the geographic extent of the concerned product markets; enhance the security of supply of the single regulatory space by providing a stable investment climate in which connections to Caspian, North African and Middle East gas reserves can be developed, and indigenous sources of energy such as natural gas, coal and hydropower can be exploited; improve the environmental situation in relation to Network Energy and related energy efficiency, foster the use of renewable energy, and set out the conditions for energy trade in the single regulatory space." 
The Energy Community has thus turned the energy market in the Balkan region into a large integrated market governed by EU standards. It defines:
"The ‘acquis communautaire on energy', for the purpose of this Treaty, shall mean (i) the Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity, (ii) the Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas, and (iii) the Regulation 1228/2003/EC of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity."
Furthermore, the Energy Treaty defines which EU Directives and Regulations concerning environmental protection, renewable energy sources and competition need to be implemented.