On 10 January 2007 the European Commission published a far-reaching report on the European gas and electricity markets. There are two key highlights:

  • The Commission’s view is that having integrated production and distribution companies makes it harder for new entrants to challenge established companies.
  • There is evidence of anti-competitive behaviour in the energy sector.

Breaking up existing integrated businesses will require EU-wide legislation. But in the meantime, the Commission has put forward ideas for making the markets more transparent and competitive.

The Commission will investigate alleged breaches of competition law using its existing powers and fine infringers. Those companies who might be drawn into any investigation are advised to examine their business practices as a matter of urgency and seek legal advice.

Competition Problems

The following were among the features identified by the European Commission as impeding effective competition on the relevant markets:

  • Structural conflicts of interest arising from extensive vertical integration – there remains a high level of vertical integration between network and supply interests in Member States. In spite of the European Commission’s liberalisation programme, insufficient unbundling has taken place between upstream generation facilities and downstream distribution networks. As a consequence, new entrants find it hard to gain access to the network and operational and investment decisions regarding the network are often taken on the basis of the supply interests of the integrated incumbent rather than the interests of the network as a whole.
  • Serious gaps in the regulatory environment – the Commission found that gas and electricity markets remain national in scope. Regulation of such markets is undertaken by national authorities. These regulatory systems do not work well together. As a consequence, there is a “regulatory gap” in the coverage of cross-border issues. More generally, the Inquiry concluded that the powers of national regulators may need to be substantially bolstered.
  • A chronic lack of liquidity – the low level of unbundling means that vertically integrated national incumbents do not need to enter the electricity and gas wholesale markets. This makes it difficult for the new entrants to gain supplies. As the Commission put it, “the lifeblood of our markets is lacking and the market power of pre-liberalisation monopolies persists.”
  • A general lack of market transparency – the Inquiry takes the stance that much more information on the operation of the sectors needs to be made available to market participants in order to enable such undertakings to make informed strategic and operational decisions. Where such information is not generally available, the risk is that incumbents with access to the information will benefit from an undue advantage.

Proposed Remedies

The Commission concludes that the application of competition law can go some way towards addressing these competition problems. The Commission’s power under the Merger Regulation give it some level of control over the development of market structures, and the Commission points to a number of investigations undertaken by it and national competition authorities in relation to alleged breaches of competition law by undertakings active in the energy sector.

However, the Commission concludes that competition law on its own is insufficient to resolve the issues identified by the Inquiry. It takes the view that structural regulatory measures are needed to open markets and address the root of the problems identified by the Inquiry.

The persistent integration of network and supply interests in many of the power companies across the EU appears to be at the origin of most of the problems identified by the Inquiry, and the Commission has therefore indicated that its clear preference would be for unbundling. The most radical way in which this could be achieved would be by full divestment. Alternatively, management of some of the infrastructure owned by the integrated power companies could be taken over by an independent operator, in the hope that this would allow competing operators to gain access on non-discriminatory terms. Enhanced powers for national regulators and greater cooperation between such regulators are one likely outcome of the Inquiry.

 Comment

The struggles over the last two years over the ownership of Spanish utility Endesa and French company Suez show that few areas of competition law are more politically sensitive than the regulation of the energy sector. The conclusion of the Commission’s Inquiry is undoubtedly just the beginning of a prolonged period of political debate. Few can doubt the importance of the issues at stake. Whether the Commission’s ambitious proposals can overcome opposition from national governments in support of their own incumbent power companies remains to be seen. On past form, a significant element of compromise is likely to be involved in the final outcome.