Commission inquiry reveals serious competition concerns energy sector

26 March 2007

Jeremy Robinson

Following eighteen-months sector inquiry, the Commission has concluded that there are serious competition problems in the energy sector. In a report released on 10 January 2007, the Commission noted that well-functioning energy markets ensuring secure energy supplies at competitive prices are essential for achieving growth and consumer welfare in the EU. However, both consumers and businesses are suffering from inefficient and expensive gas and electricity markets.

Despite the EU’s attempts to create a single liberalised energy market, the Commission found that the wholesale gas and electricity markets remain national, and generally maintain the high level of concentration of the pre-liberalisation period. The wholesale gas trade has been particularly slow to develop, and incumbents remain dominant by controlling either up-stream gas imports or domestic production. Although electricity trading is more developed but generally reflects a significant level of concentration in generation, and generators have scope to exercise market power by withdrawing capacity or raising prices.

There has been insufficient network unbundling, which is a major obstacle to new entry or investment and threatens security of supply. The Commission observed that new entrants often lack effective access to networks, and voiced suspicions that existing infrastructure operators discriminated in favour of their own affiliates. Vertical integration has further damaged the security of supply by allowing investment decisions to be taken in the interests of integrated companies rather than network or infrastructure operations. Vertical integration has also reduced the incentives for incumbents to trade on wholesale markets, damaging liquidity. Further, long-term supply contracts between producers and incumbent importers make it difficult for new entrants to gain access to upstream markets.

The Commission also observed that incumbents rarely enter other national markets as competitors owing to insufficient or unavailable cross-border capacity and different market designs. For gas, pre-liberalisation legacy contracts and ineffective congestion management mechanisms make it difficult for new entrants to secure even small volumes of short-term, interruptible capacity on the secondary market. In electricity, integration is hampered by insufficient interconnector capacity, despite the ruling of the ECJ that capacity reservations are not compatible with EC law unless they were notified under Directive 96/92/EC.

In the Commission’s view, market information is not transparent, giving vertically-integrated incumbents an advantage over their competitors. Of particular importance is the lack of timely and reliable data about network availability, especially for electricity interconnections and gas transit pipelines. More effective and transparent price formation is also required to deliver to consumers the full advantages of the liberalised market. The Commission noted that regulated tariffs imposed by some Member States, which set prices below those of an open market, discouraged new entry and effectively led to re-regulation.

At retail level, the Commission emphasised the length of contractual ties for industrial customers and local distribution companies, leading to a lack of competitive offers to customers. For gas, problems with gas delivery and disposal prevented customers from gaining the benefit of efficiencies, whereas for electricity, restrictions in certain standard contracts raised potential competition problems.

To resolve these problems, the Commission intends to make full use of its powers under competition, state aid and merger control law, in conjunction with striving to improve the regulatory framework for energy liberalisation.

Source: Final Report on the Commission Inquiry pursuant to Article 17 of Regulation (EC) No1/2003 into the European gas and electricity sectors available here.