On 3 March 2015, the Romanian Competition Council (‘RCC’) published its long-awaited report on the sector inquiry into the national electricity market.
The RCC first announced the launch of the inquiry more than five years ago, on 20 January 2010.
The President of the RCC, Mr. Bogdan Chiriţoiu, who has been recently reappointed for another five year term at the head of the competition authority, commented at the time: “Taking into consideration the upmost importance of the electricity market for Romanian consumers and for the national economy, our endeavour mainly aims to carrying out an in-depth examination of the sector’s competition mechanisms, identifying and finding ways to remedy potential dysfunctions of anticompetitive nature, as well as stimulating market transparency by publishing the inquiry’s conclusions”.
The initiative followed the RCC’s involvement during 2008–2010 in the drafting of legislation to restructure the electricity generation sector and was also sparked by reports in the mass media at the time involving sensitive competition issues relating to the trade in hydropower. This information eventually led the European Commission to step in and announce, in April 2012, that it had decided to open formal investigations under Article 108(2) TFEU concerning alleged preferential tariffs in contracts concluded between Hidroelectrica SA (Romania’s largest electricity producer, focusing on hydropower) with electricity traders, thermoelectricity sellers and industrial producers, respectively. The Commission has yet to announce its conclusions but there is suspicion that unlawful State aid may have been granted in these particular cases.
The RCC’s sector inquiry analysed the period between 2008–2013 and focused mainly on identifying the national electricity market’s features; defining relevant markets; evaluating the national electricity generation capacity; the evolution of investment projects into new production sites; the interconnection links with neighbouring countries; the barriers to entry; the evolution and characteristics of national electricity demand; patterns of power consumption; as well as the influence of the regulated ‘energy basket’ on the market open to competition.
Relevant markets and concentration levels
Following its analysis, the RCC has concluded that four main relevant product markets can be defined, each with several segments: (1) the electricity generation and trade market; (2) the electricity supply market; (3) the electricity transmission market; and (4) the electricity distribution market.
The RCC also concluded that the relevant geographic market is primarily the national market, with the exception of the relevant geographic market for electricity distribution which was found to cover several regions of the country corresponding to the areas under concession by the distribution companies, which hold a virtual monopoly over their respective area.
The market concentration levels throughout the analysed period were rather moderate on the electricity generation and trade market. Instead, the balancing market was found to be highly concentrated, while the electricity supply market had low concentration levels.
The RCC further concluded that a correlation between future energy projects, the development of the electricity transmission network and particularly the enhancing of interconnection capacities with neighbouring countries were necessary.
Electricity producers encouraged to diversify their generation capacities
All electricity producers were found to compete on the same relevant market, regardless of the technology or energy sources used. The RCC could not identify any consumer preferences for specific power sources or technologies, as electricity is, in any way, a homogenous product. As a particularity of the Romanian electricity sector and unlike most electricity markets in other EU Member States, all major producers in Romania use electricity generation technologies that are mainly dependant on only one source of energy. With this in mind, the RCC recommended electricity producers to diversify their electricity generation capacities so as to become more competitive and less exposed to the inherent risk of depending on only one generation source.
Obligation of trading electricity on centralised markets and legal monopoly of OPCOM
The analysis of the RCC also touched upon the adverse market effects of the restriction to conclude contracts outside centralised markets. Such a prohibition was introduced by the Electricity and Natural Gas Law No. 123/2012, which provided that electricity producers have the obligation to offer publicly and in a non-discriminatory manner on the competitive market all electricity produced. Furthermore, transactions with electricity are to be concluded only on the centralised market, hosted by the power exchange operator OPCOM, in a transparent, public, centralised and non-discriminating manner, through public auction.
The RCC concluded that this obligation, even if interpreted as not restricting exports, hindered the development of the electricity market and recommended for it to be eliminated. In addition, the RCC pointed out the need for a study concerning the possibility of opening the electricity trading intermediation services market also to other platforms that could compete with OPCOM.
Lack of access to financial instruments
From the RCC’s standpoint, the electricity market participants lacked access to financial instruments for risk management purposes and therefore it recommended to the relevant authorities to analyse the financial instruments used in other Member States and to implement those which meet the needs of the Romanian electricity market.
Existing transmission tariffs may cause market distortions
The RCC also found that the way in which the electricity transmission tariffs were regulated depended on geographic criteria, a method which appears not to be objectively justified. Different tariffs for different areas of the country may cause market segmentation and distortions that are not justified by security or balance concerns.
Suspected dominance of state-owned electricity producers
The RCC found that state-owned electricity producers in Romania could be considered as being part of the same economic unit, lacking independent power of decision. This is mainly due to the transfer of the state-owned electricity producers from the portfolio of the Ministry of Economy to the portfolio of the Department of Energy and the increase of the management rights of the Department of Energy in the respective companies through Government Decision no. 429/2013. Therefore, the State may be viewed as exercising a decisive influence over the activity of the electricity producers. When viewed as being part of the same economic unit, the state-owned electricity producers hold a quasi-monopoly on the electricity generation and trade market, having roughly a 85 - 90% market share.
Investigation regarding long-term contracts
Long-term electricity contracts concluded by Hidroelectrica SA with a number of its clients are under investigation by the European Commission for suspicion of illegal State aid. In parallel, the RCC is also running a separate investigation regarding a potential breach of Article 5 of the Competition Law no. 21/1996, corresponding to Article 101 TFEU, by Hidroelectrica and its clients. The report is limited to stating that such contracts may have significantly affected competition on the market and that there are suspicions of possible Article 5 violations.
Investigation against the energy market regulatory authority
The RCC considered that certain regulations issued by the energy market regulatory authority, ANRE, instituted an ‘energy basket’ which may distort competition and be discriminatory at the same time. The regulations indirectly establish the market position of every electricity producer by introducing priority orders for each producer for the selling of electricity supplies. The RCC is currently conducting an investigation against ANRE.
Competition on connected markets
The RCC also expressed its concerns in relation to the competition on markets connected with activities that are a natural monopoly, especially the market for grid connection services. The distribution system operator controls the awarding of the grid connection contract and the financial aspects pertaining to such contract. In the RCC’s opinion the distribution system operator therefore has the power to influence the competition on this connected market. The RCC points out that in some cases the distribution system operator chooses the type and even the actual brand of the equipment to be used for the grid connection works, although the technical standards could be met by a large array of equipment. The RCC encourages that the final user be allowed to freely choose the third party providing the execution or design services for the grid connection and to be able to pay directly the price for the services provided.
Another concern is raised in relation to the price charged for services connected to regulated activities. The RCC’s analysis showed that the price for such services has been significantly increased, in some cases up to 100% per year. The RCC admits that it may be difficult to investigate such prices from an abuse of dominance perspective (as excessive pricing) and is more inclined to recommend that such connected services be regulated in the future.
The full report of the RCC can be accessed in the Romanian language here.