The European Commission (Commission) is seeking comments on commitments offered by Czech electricity incumbent operator, CEZ, to address allegations that it may have infringed EU antitrust rules by restricting market entry on the Czech electricity market, in particular through excessive capacity reservations. The case is one of a steady stream of cases where the Commission is resolving EU antitrust cases in the energy sector and elsewhere by consent with investigated parties using “commitment decisions”. However, a concern has been raised that the Commission might resolve cases using commitments where the legal and evidential basis is less robust than in the case of a full infringement decision.

Commitments in EU antitrust cases

Since May 2004, pursuant to Article 9 of Regulation 1/2003, the Commission has been able to resolve competition investigations into the EU prohibitions of restrictive agreements and abuse of dominance using a commitments decision. The procedure bears some resemblance to formal settlements in the U.S. known as consent decrees.

From the perspective of the Commission, commitments offer savings in terms of timing and resources through a quicker resolution of the case. EU antitrust investigations can take a number of years, even at the administrative stage, if contested. Commitments, by involving investigated and third parties in the resolution procedure, may arguably be more flexible offering a more targeted market-driven and consensual resolution.

From the perspective of the investigated parties, commitments offer a speedier closure to the investigation. This is borne out by CEZ’s own public statement that it has “decided to put a quick end to the investigation,” even though it disputes that it has infringed EU law. Commitments also mean that no fine will be imposed by the Commission for the substantive infringement, although the Commission may impose fines if the commitments are breached. Commitments also offer more control over the process than if the Commission made an infringement decision under Article 7 of Regulation 1/2003 and imposed its own remedy. Also, commitments decisions cannot be used as proof of an infringement of EU law in a private antitrust action, although third parties may cite that the Commission raised concerns.

Third parties are able to comment on proposed commitments which gives them an opportunity to influence the final outcome, although they have less extensive procedural rights than investigated parties.

Background

The Commission’s investigation began in November 2009 when it carried out an unannounced inspection visit (‘dawn raid’) at the premises of CEZ and other parties active in the Czech electricity sector. In July 2011, the Commission stated that it had opened formal antitrust proceedings on suspicion that CEZ had infringed the EU prohibition on abuse of dominance contained in Article 102 of the Treaty on the Functioning of the EU (TFEU).

The Commission is of the view that CEZ is dominant on the market for generation and wholesale supply of electricity in the Czech Republic. The Commission stated in its preliminary assessment that it suspects CEZ may have abused its dominant position, in particular through pre-emptive booking of capacity in the Czech transmission network, thereby preventing competitors from making investments and hindering their entry into the generation and wholesale electricity supply markets in the Czech Republic.

The proposed commitments

Under the proposed commitments, CEZ offers to divest one of the following generation assets in the Czech Republic: Pocerady, Chvaletice, Detamorovice, or Melnik III together with Tiscova.

The commitments are accompanied by extensive supporting provisions including that:

  • the relevant business must be divested as a ‘going concern’ to a purchaser and on terms approved by the Commission. The purchaser must be independent of and unconnected with CEZ, have the financial resources, ability to secure adequate amount of fuel supply, proven expertise, and incentives to maintain and develop the divestment business as a viable and active competitor;
  • the divestment must be completed within three months of approval of the purchaser and the terms of sale by the Commission;
  • CEZ shall, for a period of 10 years from the divestment, not acquire direct or indirect influence over the whole or part of the divestment business;
  • the divestment must include all tangible and intangible assets relating to the current operation of the business or which are necessary to ensure its viability and competitiveness;
  • until divestment, CEZ must preserve the economic viability, marketability, and competitiveness of the divestment business;
  • CEZ commits to keep the business to be divested separate from its retained business. CEZ agrees not to solicit key personnel transferred for a period of two years after the divestment;
  • a monitoring trustee will oversee the ongoing management of the divestment business.

Commitments in context

In the eight years of operation of the commitments procedure, it has become an important instrument of EU antitrust enforcement. The use of commitments is not confined to the energy sector. For example, on August 10, 2012 the Commission opened a market test of commitments offered by the mining company Rio Tinto Alcan seeking to alleviate concerns raised around alleged unlawful tying. In July 2012, the Commission announced that Thomson Reuters had offered a second round of commitments designed to address alleged abuse of dominance in the market for real-time financial information.

The use of commitments in the energy sector has, however, been particularly striking with a significant number of cases being resolved through commitments. The first case involved Distrigaz and concerned long-term contracts allegedly tying a substantial proportion of customers to Distrigaz in Belgium. In 2007, commitments were made binding on Distrigaz, including an obligation that in each calendar year a minimum of 54 per cent of its gas volumes would be made available for alternative suppliers and unilateral termination rights of Distrigaz customers after five years.

Since then, the Commission has actively deployed commitments across the EU energy sector, both in the electricity and gas markets. Of particular note are cases involving structural remedies as in the current CEZ case.

In November 2008, the Commission accepted structural remedies from E.ON binding the latter to divest approximately 20 per cent of its generation capacity and transmissions business. The Commission had concerns that E.ON withheld available generation capacity from the German electricity wholesale market, allegedly increasing prices above the competitive level.

The Commission has also accepted structural remedies in a case involving RWE, where it alleged that RWE Transmission System Operator had maintained artificial barriers for other gas companies to gain access to its network. The Commission also suspected that RWE was engaged in a strategy of capacity hoarding, allocated capacity in a way which may have been inefficient, and may have set its tariffs at such a level as to squeeze competitors’ margins (margin squeeze).

In assessing these structural commitments and the proposed commitments offered by CEZ, a question arises as to the legal basis for and proportionality of the commitments. On the one hand, the theory of harm advanced in such cases (for example, capacity hoarding, and strategic under-investment) may be regarded to be at least novel and more speculative where counterarguments can be raised as to the commercial and economic rationale of particular strategies. It may also be asked whether the Commission, the investigated parties, or third parties are best placed to judge what is the optimum level of investment.

Also, it has been asked whether such onerous structural remedies would stand scrutiny under EU law principles of proportionality when abuses may arise from the very structure of the investigated parties and where less onerous behavioural remedies might be contemplated.

In a seminal judgment on June 29, 2010, the Court of Justice of the EU (CJEU) decided important questions as to the scope of judicial review of commitments in a case involving De Beers and Alrosa. The Commission investigated concerns that De Beers’ long-term purchase relationship with its competitor Alrosa could infringe Article 101/ 102 TFEU. The Court set aside the General Court’s judgment overturning the Commission’s decision accepting commitments offered by De Beers to discontinue the long-term supply arrangements. The CJEU considered that the proportionality test, when conducted in relation to a decision to make commitments binding under Article 9, only requires the Commission to consider whether the commitments offered address the competition problem it has identified. The Commission is not therefore required to consider whether the commitments would amount to a proportionate remedy as it would do under Article 7 Regulation 1/2003 when making a full infringement decision. Any commitment that goes further than a remedy that could lawfully be imposed under Article 7 is not, necessarily, unlawful under EU law. While the De Beers case has clarified some important questions regarding the Commission’s powers and legal duties when accepting commitments, it has not answered all such questions. It must surely be the case that an investigated party and third parties might have scope for recourse to the EU courts in appropriate cases where their procedural rights in the Commission’s procedure for accepting commitments have been violated. This recognises that third parties, according to the CJEU, have less extensive procedural rights than investigated parties in such procedures.

Conclusion

It was thought that the Commission might be coming to the end of its antitrust investigations on the back of its 2005 – 2007 energy sector inquiry that spawned a large number of antitrust cases. However, as the CEZ case shows the Commission’s antitrust enforcement in the energy sector shows no signs of relenting. The principles outlined in the commitments decisions dealing with such issues as long-term contracts, capacity hoarding, strategic underinvestment, and margin squeeze will no doubt continue to be relevant to energy companies operating in Europe even accepting that such commitments decisions do not amount to a full infringement decision. They will also remain relevant as energy companies, whether active or seeking entry and expansion in EU markets, assess their options and monitor their commercial operations for EU antitrust compliance.