On 27 September, 2011, the European Commission announced that it had conducted unannounced inspections - so-called “dawn raids” - at the premises of companies active in the supply, transmission, and storage of natural gas in ten EU Member States, and across 20 or so sites, mainly in Central and Eastern Europe.

Companies that have confirmed searches according to public sources include: Gazprom at its German (Gazprom Germania) and Czech (Vemex) offices; RWE at its German and Czech offices; Germany’s E.ON Rurgas; Poland’s PGNiG; Austrian group OMV; and Bulgaria’s Overgas.

The Commission states that it has reason to believe that the companies may have engaged in anticompetitive practices in breach of the EU prohibitions on restrictive agreements and abuse of a dominant position contained in Article 101 and/or Article 102 of the Treaty on the functioning of the European Union.

Scope of the Investigation

The Commission’s interest in competition in the energy sector is not new. Following its energy sector inquiry between 2005 and 2007, the Commission concluded a series of antitrust investigations against a number of gas incumbents in Western Europe (including RWE and E.On).

The Commission states in the context of the current investigation that it is “determined that consumers throughout the [EU] should enjoy the benefits of an integrated and competitive single European energy market that increases security of supply of energy at affordable prices,” and that “[t]his means in particular ensuring the diversification of sources of supply and the free flow of gas once it has entered the EU.”

However, these new investigations concern not only incumbents but also upstream suppliers. According to the Commission, its investigation is focused on the upstream supply level, where, it has reason to believe competition may be being hampered or delayed. The Commission raises suspicions of exclusionary behaviour, such as market partitioning, obstacles to network access, barriers to supply diversification, and possible exploitative behaviour, such as excessive pricing. The Commission also states that it is probing “anticompetitive behaviour to the detriment of upstream suppliers themselves.”

A Gazprom representative has publicly described the inspections as “standard practice.” The representative stated that Gazprom was searched back in 2005 and no antitrust violations were found. [1] RWE has stated that the inspections related to a “follow-up investigation of allegedly anticompetitive clauses in gas supply contracts.” [2]

Lithuania may have been a trigger to the investigation. In January 2011, Lithuania formally complained to the Commission that Gazprom was abusing its dominant position and was acting to hinder liberalisation of the EU energy market. The complaints are believed to relate to alleged non-transparent pricing that led to large disparities. According to the Russian newspaper Kommersant, in 2010, for example, 1,000 cubic metres of natural gas cost Lithuania USD 348 and Belarus USD 184.

First energy sector dawn raids in some EU countries

The Commission also states that, in most countries, these inspections were the Commission’s first competition inspections in the energy sector and, in some, the Commission’s first ever competition inspections.

While the authority of the Commission to conduct unannounced inspection visits is well-established, the investigation comes at a time when there is a growing disquiet among businesses with EU operations about the increasing intrusiveness of the Commission’s investigatory procedures. A number of pending cases including those brought by Deutsche Bahn, Cemex, and Holcim have raised questions as to the proper scope of such powers.

A challenge before the EU courts brought by Deutsche Bahn is that the Commission should have permitted it to have a judicial review of the inspection decision; that the Commission’s review amounted to a “fishing expedition”; and that the raids were “disproportionate.” This case is likely to test the limits of fundamental rights under EU law as far as unannounced inspection visits are concerned, arguing that a prior judicial authority is needed for the Commission to conduct a dawn raid.

Holcim and other cement makers have also challenged the Commission’s exercise of its investigatory powers. In particular, they allege they were asked for information which the Commission knew they did not have and that insufficient time was given to respond to the statement of objections.

Next Steps

The inspections are a preliminary step in the Commission’s investigation and do not necessarily mean that the Commission has evidence of a conclusive finding of infringement.

Representatives of the companies concerned including those from OMV, E.ON, and Gazprom have confirmed that they are cooperating with the Commission within the limits of legal requirements. A Gazprom representative has publicly stated that the company is prepared to defend its rights in court. The high-profile nature of the case was exemplified by public statements from Prime Minister Vladimir Putin on October 3, saying that his government would follow the case “with close attention.”

One factor which could be a significant driver of the outcome will be the extent to which the investigated parties offer commitments to seek to resolve the concerns identified by the Commission. A procedure is available under Article 9 of Regulation 1/2003 which allows the Commission to accept “binding commitments” from the parties to bring to an end a competition investigation and without imposing a fine. Of note has been the widespread use of such a procedure in the energy sector including in cases involving RWE, E.ON, and ENI. However, such cases have been controversial since they result from an abbreviated investigatory procedure and no formal finding of infringement.

The conclusion of the current investigation may be some years off. The timing and course will depend on a range of factors including the nature of the evidence gathered, third party submissions, and the extent to which individual companies are prepared to challenge the Commission on substantive and/or procedural grounds.