Has the market liberalisation delivered? CEPI Seminar: Energy – Balance of Power Brussels 30 November 2005 Has the market liberalisation delivered? Augustijn van Haasteren DG Competition, Energy and water unit

Outline Energy liberalisation: Sector inquiry What is next? Where do we come from? The objectives The instruments Legal framework Competition law enforcement Sector inquiry Context and starting point First issues Electricity Gas What is next? structure analysis on the basis of 5 key strands already outlined these strands are also reflected in the section of the IP devoted to gas which is in front of you would like to underline that have honour to present first results of the work, but that an entire team of +/10 people is behind these gas findings I’ll now turn to each of those in turn

Liberalisation: where do we come from? Network industry (natural monopoly) Exclusive rights Horizontal segmentation Vertical integration of network and sales

Liberalisation: the objectives Aim: creation of an integrated and competitive market Why integration? Competition on the supply side Competition on the demand side: “market opening” Ensuring effective, transparent and non-discriminatory third party access (‘TPA’) to infrastructure Instruments: Regulatory framework Competition law instruments

Liberalisation: legal framework(1) 1st stage: 1996-2003 first Electricity Directive (1996) first Gas Directive (1998) Ingrediënts: elimination of exclusive rights gradual “market” opening choice between regulated TPA and negotiated TPA for access to networks challenging vertical integration: accounts unbundling

Liberalization: legal framework (2) 2nd stage : 2003 Acceleration package Improved ingredients: accelerated market opening 1st July 2004, for non-households 1st July 2007, for households regulated access to transport and distribution networks regulated or negotiated access to storage capacities management and legal unbundling obligatory sectoral regulator Late and minimalist implementation 18 mis en demuere in 2004, 6 countries taken to court in June 2005

Liberalisation: competition law (1) Instruments: Anti-trust law (Articles 81, 82 and 86 EC) Merger control Sector inquiries Complements liberalisation aim: Abolishing barriers to supply competition Allowing effective customer choice Complementing TPA enforcement Formation of national champions Elimination of entrants

Liberalisation: competition law (2) Anti-trust law Supply competition: Territorial restrictions (TR) in the gas sector (Gazprom & Sonatrach) Joint sales practices in the gas sector (Norwegian GFU, Duc/Dong) Customer’s choice Long term agreements that give rise to foreclosure: Pending cases in Belgium (EU) and Germany (BKA) Access to networks: “Marathon” cases: TPA commitments Focus on interconnectors: e.g. capacity allocation UK-France Territorial restrictions (TR) in the gas sector (Gazprom & Sonatrach) - import competition key in view of high entry costs - web of TR has same effects as horizontal cartel - facilitating entry of the producers

Liberalisation: competition law (3) Merger control Remedies to promote liberalization. e.g. EdF/EnBW. EDF agreed to make available to competitors 6,000 MW located in France in VPP EDF withdraws from CNR and WATT Strict control of mergers between electricity and gas incumbents. Recent prohibition decision EDP-GDP-ENI entry of EDF in EnBW Competition concerns: strenghtening of EdF’s dominant position in France through the elimination of potential competition from EnBW (due to be closest neighbour to French market) EdF would have controlled a large part of peak load through EnBW’s participation in WATT (Switzerland) Remedies: withdrawal of EdF from CNR thereby creating an independent player in the French electricity market access to French generation capacity through virtual power plant auctions divestiture of EnBW’s participation in WATT Merger control in the energy sector (4) entry of EnBW in Hidrocantabrico background: the Spanish wholesale market is dominated by two firms Strengthening of the duopoly by the entry in Hidrocantabrico of EdF; EdF would therefore loose all incentives to become the main competitor for the Spanish wholesale market, and to push for increase of import capacities substantial increase of interconnector capacities in several steps at the French/Spanish border

Sector inquiry (1): Context Implementation report – sector inquiry Pro-active competition policy As Community legislator responsible for EU energy regulation the Commission will evaluate the implementation of the Community legislation (Implementation/benchmarking report) As Community competition authority responsible for competition policy the Commission will evaluate indications of market malfunctioning (sector inquiry) Close co-ordination Legal basis Regulation 1/2003 article 17 Revision of old procedural rules (reg 17/62) Commission has same investigative powers as in case investigations (one minor exception) Companies obliged to answer Commission requests for information Confidential business secrets protected According to Article 17 of Regulation 1/2003 EC, the Commission may conduct general inquiries into a particular sector of the economy or a particular type of agreements across various sectors where a trend of trade between Member states, price rigidity or other circumstances suggest that competition may be restricted or distorted within the Common Market. Indications that specific undertakings have infringed the relevant Treaty provisions are not required. Under Article 17, the Commission may publish a report on the results of its inquiry, and invite comments from interested parties. Once the Commission has adopted a decision under Article 17 of Regulation 1/2003, it will have investigative powers to obtain all necessary information from undertaking and associations of undertakings. The investigative powers available under this inquiry will be those pursuant to Articles 18, 19, 20 and 22 of Regulation 1/2003. Article 18(1) allows the Commission to request, or require by decision, all necessary information from undertakings and associations of undertakings, with scope for fines under Article 23 and 24 where information is misleading or incorrect, or where (following a decision that requires the provision of information) responses are incomplete or absent. Article 18(6) also allows the Commission to request all necessary information from governments and national competition authorities. Under Article 19, the Commission can take oral statements from natural or legal persons that consent to do so. The Commission will also have the power under Article 20 to undertake inspections in the framework of the inquiry or, in accordance with Article 22, ask a national competition authority to conduct such an inspection on its behalf.

Sector inquiry (2): Starting points Indications of market rigidities Price increases & weak competitive pressure Highly concentrated market structure Slow market integration; i.e. relevant markets remain national High barriers to entry; few new entrants Consumer complaints

Electricity Issue 1: Market concentration The level of concentration in generation is high in many countries creating scope for market power for incumbent operators. The generators, due to the characteristics of the electricity markets, are able to influence prices by the use of generation capacity available to them. Whilst the level of concentration on observable wholesale markets (power exchanges and trading platforms) is less striking, no conclusion can at this stage be drawn about the satisfactory functioning of these markets.

Electricity Issue 2: Vertical foreclosure A high degree of vertical integration between generation and supply leads to illiquid wholesale markets. Long term power purchase agreements between independent power producers and incumbent operators can have similar effects. Illiquid wholesale markets are a significant obstacle for new entrants. Inadequate unbundling between network and supply activities undermines new entry.

Electricity Issue 3: Insufficient market integration Interconnectors are key for market integration Long term capacity reservations (grand fathering) and inadequate capacity allocation rules are barriers to efficient market integration (However, recent ECJ ruling) Incentives to increase capacity. Unless more efficient use of revenues is available, congestion fees should be ringfenced with the view to using the revenues for reinforcing the existing interconnectors. Reduction of administrative burdens to build new interconnectors is important.

Electricity Issue 4: Transparency Lacking transparency on wholesale markets is a barrier for entry and does not provide for a level playing field for electricity trading. 83% of suppliers, traders and generators believe that useful, important or indispensable information is lacking.

Electricity Issue 5: Prices Trust in functioning wholesale markets, which is crucial for the success of the liberalisation exercise, is currently lacking. Large energy consumers do not believe that prices on wholesale markets are resulting from fair competition. Co-existence of regulated and free market prices cause distortions.

Gas Issue 1: Market concentration The level of concentration remains very high in most national gas markets. Market entry at wholesale level is limited by the incumbents’ control of gas import contracts. Some incumbents also control indigenous gas production. Import contracts are typically flexible as to volumes, reducing incumbents’ need to trade gas. Most contracts are of very long duration with 15-20 years being typical. Control over the gas available within nearly all national markets is thus highly concentrated to the benefit of the historical incumbents.

Gas Issue 2:Vertical foreclosure Vertical integration and limited sales by incumbents on gas hubs result in low liquidity on wholesale gas markets that hinder new entry. Despite the unbundling requirements of the EU gas directive, new entrants believe that network operators continue practices favouring the related supply company (IT, commercial info) Long term contracts between importers and customers lead to foreclosure in certain geographic markets (B, D). Other barriers to entry dominate in other markets (such as storage). Persistent allegations of abusive behaviour that inhibits switching opportunities.

Gas Issue 3: insufficient market integration Clauses in import contracts dating from pre-liberalisation times have contributed to market segmentation (UIOLI). Access to cross-border pipelines and entry points to national gas systems are key factors for market integration. The main reason that access to import pipes is limited is the preferential treatment of pre-liberalisation contracts. Within the current framework of these contracts there seems to be scope for optimisation of the use of the pipelines. Swaps can substitute physical transport of gas and can offer some solutions to congestion problems. However, they will generally tend to favour the incumbents.

Gas Issue 4: Lack of transparency Increased transparency about access to networks is vital. Information is notably lacking for cross-border pipelines and entry points into national markets

Gas Issue 5: Prices Prices in most long term supply contracts are currently linked to oil or oil derivatives. No trend towards more market based pricing is observable. The price indexes in long term contracts between gas producers and importers are similar across Europe.

Conclusion Has the market liberalisation delivered? We can certainly do better!

What’s next DG Competition/sector inquiry: DG Transport and Energy Public presentation of preliminary report: 16 February 2006, followed by public consultation Final report: second half 2006 Expect anti-trust enforcement to start in parallel DG Transport and Energy Will investigate effectiveness of legislative and regulatory measures

More information DG Competition website: www.europa.eu.int/comm/competition/antitrust/others/sector_inquiries/energy/ DG Transport and Energy website: www.europa.eu.int/comm/energy/electricity/report_2005/index_en.htm/ Questions/comments: comp-energy-sector-inquiry@cec.eu.int

Thank you for your attention