The view from Brussels

Why we need an open and more competitive EU energy market

An open and competitive single EU market is the only reliable way to safeguard secure energy supplies. Such an open market will guarantee security of supply as it will attract external suppliers, embrace new energy mixes and ensure the internal strength needed to face international challenges. This is one of the reasons why, during the 1990s, the EU decided to open the energy sector to competition.

Lorena Boix Alonso, abogada y miembro del Gabinete del Comisionado Europeo de la Competencia, considera que no es posible la provisión de energía de manera sostenible, económica y segura sin un mercado energético libre y competitivo. Esta forma de mercado abierto garantiza mayor seguridad, la capacidad de acoger más tipos de energía y la fuerza para competir con el mercado internacional. Sin embargo, la situación actual es preocupante: en primer lugar, la gran concentración del mercado; en segundo, las dificultades de acceso a las fuentes de energía; en tercero, la limitada integración que existe entre países miembros, y finalmente, la falta de transparencia. Apunta que un control adecuado de las fusiones es fundamental para liberalizar el mercado.

However, we are far from achieving this important objective. The initial results of the Commission’s competition inquiry into the energy sector show a very worrying picture.

First, there is a high degree of market concentration. Most gas and electricity markets reflect the old structure of national monopolies. Gas incumbents often control imports and domestic production and electricity incumbents tend to control generation capacity.

 Second, there is a lack of liquidity. Alternative providers cannot access the gas and electricity needed to offer supplies to consumers. This is because incumbents are often vertically integrated and not interested in trading with new entrants. Moreover, longterm supply contracts between gas producers and incumbent importers can lock the market in.

The third area of concern is the very limited integration between Member States. Gas and electricity markets are mainly national. In gas markets, the primary capacity on transit pipelines is controlled by incumbents based on legacy contracts. On electricity markets, there is insufficient interconnector capacity and capacity is very often reserved long-term.

The fourth problem is lack of transparency. Better access to information is crucial to allow new entries and create confidence in trading and investment. Finally, more effective and transparent price formation is needed.

These problems can be exacerbated by mergers, the clearest example being the EDP/GDP merger, which the Commission prohibited. Equally worrying is the recent trend towards protectionism by some European governments that, in some instances, seek to create or maintain “national champions” regardless of their capacity to effectively compete on global markets.

European competition law can play a central role in opening energy markets if applied in a pro-active and co-ordinated manner. Apart from launching an energy sector inquiry, by itself a powerful tool, the Commission makes use of merger control and antitrust rules.

Proper merger control is crucial, as deregulation prompts merger activity. Mergers and acquisitions are indeed increasing. Initially, they took place mainly in the oil market (e.g. BP/AMOCO, EXXON/Mobil), while more recently we have seen gas to electricity mergers, aiming to integrate gas and power within the same group (e.g. E.ON/Ruhrgas, DONG/Elsam, or EDP/GDP). The current wave of mergers (Gas Natural/Endesa, E.ON/Endesa or GDF/Suez) concerns companies that already have both gas and electricity operations and aim to increase their size and geographical spread.

The Commission prohibited EDP/GDP. In E.ON/MOL and DONG/Elsam, the Commission identified competition problems and so required remedies of ownership unbundling and gas releases which reduced the scope for foreclosure and increased liquidity.

Other important instruments are the antitrust rules dealing with anticompetitive agreements and abuses of dominant position (Articles 81 and 82 of the EC Treaty). The Commission does not hesitate to apply these rules for example to tackle cases of vertical foreclosure caused by long-term contracts and the hoarding of capacity on pipelines, gas storage and interconnectors.

In May, the Commission carried out unannounced inspections on gas companies in Germany, Italy, France, Belgium and Austria and electricity companies in Hungary to investigate possible breaches of antitrust rules.

 I believe that sustainable, competitive and secure energy will not be achieved without open and competitive energy markets, based on competition between companies seeking to become European-wide competitors.

Lorena Boix Alonso is a Spanish lawyer and the member of the Cabinet of European Competition Commissioner, Neelie Kroes, responsible for antitrust and mergers (Lorena.boix-alonso@cec.eu.int).

The view from Brussels

Garcia-Sicilia

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