1. Ricardo CARDOSO DE ANDRADE, DG COMP B-1 6 September 2006 Competition Directorate-General Energy Sector Inquiry – findings and the way forward Presentation for SVSE, Prague

2. Introduction and wider context Liberalisation: achievement and failure Energy markets have been increasingly in the news The Green Paper –Achieving a sustainable, competitive and secure energy policy

3. Energy sector inquiry – timetable Sector Inquiry – launched June 2005 Issues Paper – November 2005 Preliminary Results – February 2006 Final Report – by the end of 2006 Objective –Gather information to identify possible restrictions or distortions of competition

4. Preliminary findings (1) Market Concentration –High concentration –Strong grip of incumbents, little entry

5. Market Concentration - gas High levels of concentration at wholesale level Incumbents largely control imports and domestic production Traded markets dominated by incumbents

6. Market concentration - electricity Incumbents control generation assets giving them scope to exercise market power by –withdrawing capacity or –increasing prices Scope for influencing prices exists at a number of power exchanges (examples: I, E, DK)

7. Preliminary findings (2) Vertical foreclosure –Long-term contracts and lack of liquidity –“gatekeeper position” of incumbents, foreclosure of new entrants

8. Vertical foreclosure – gas infrastructure Gas infrastructure remains mostly owned by incumbents and not sufficiently unbundled Long-term capacity reservations in “transit” pipelines and storage

9. Vertical foreclosure - electricity Many market participants complain about inadequate unbundling of network and supply activities TSO level: –Grid connection for new power plants –Interconnectors –Transparency DSO level: –Inappropriate switching procedures –Lack of ‘Chinese walls’ –Discriminatory access tariffs

10. Preliminary findings (3) Lack of market integration –Markets are mainly national, with incumbents staying in their own territory.

11. Market integration – gas import routes

12. Market integration – electricity imports Competition from imports is insufficient to erode market power of incumbents More interconnector capacity is needed Many interconnectors are chronically congested Long term capacity reservations reduce capacity available for new entrants

13. Preliminary findings (4) Lack of transparency –Better access to information is crucial for establishing a level playing field.

14. Lack of transparency - gas Gas market remains opaque and more transparency is needed Network users want reliable and timely information, beyond minimum requirements of EU legislation Confidentiality should not be used as a cloak to prevent proper disclosure

15. Lack of transparency - electricity The level of transparency varies widely between Member States 83% of market participants are not content with current levels of transparency

16. Preliminary findings (5) Price formation –There is a lack of confidence that wholesale prices are the result of fair competition.

17. Gas price formation – indexation

18. Electricity price formation Increase of fuel prices cannot fully explain price increases in all Member States CO2 allowance prices influence electricity prices, however analysts disagree as to the extent

19. Way forward (competition) Merger control –EU-wide competitors, rather than dominant national players Antitrust investigations –Vertical foreclosure, capacity hoarding, etc. –Further analyse price-setting mechanisms on electricity wholesale markets State aid control

20. Inspections Unannounced inspections, in May, at the premises of gas and electricity companies in 6 Member States: –Germany, France, Belgium, Italy, Austria and Hungary A considerable amount of information has been collected, and this must now be studied in detail Inspections constitute only a preliminary step

21. Way forward (regulation) Ensuring transposition of liberalisation directives Strengthening transparency obligations Access to capacity on cross-border transport infrastructure Regulation of the international segments of the grids Unbundling of infrastructure and supply

22. Conclusions First reactions –Positive feedback on inquiry findings –Divergent view on the way forward The security of supply issue High energy prices

23. Thank you for your attention.