Commission opens the German energy sector up to competition

23 January 2009

Richard Eccles, Mary Smillie

On 26 November 2008, the European Commission adopted a decision making divestment commitments offered by E.ON legally binding.  The commitments were to divest about 20% of generation capacity and its transmission systems business, run by E.ON Netz comprising an Extra-High-Voltage line network and system operations.  This is the first time in European antitrust history that a company is divesting very significant assets to address competition concerns.  Specifically, E.ON will divest about 5,000 MW generation capacity in Germany from a wide range of technologies and fuels such as hydro-electric, lignite, hard coal, pump storage and nuclear.  This reduces E.ON’s ability to withdraw capacity and hence raise prices, and also opens up the market to competition.  The assets will be sold under the supervision of a trustee, and all buyers have to be approved by the Commission. 

In the second aspect of the case, E.ON will divest its Extra High Voltage line network of 380/220 kV and systems operations run by E.ON Netz.  The divestment of the network will remove any incentive for the operator of the network to favour a particular supplier.

The Commission’s decision, a so-called “commitment decision” is based on Article 9 of Regulation 1/2003 on the implementation of the EC Treaty’s competition rules.  An Article 9 decision finds that there are no longer grounds for action by the Commission, without concluding whether or not there has been or still is an infringement.  If E.ON were to break its commitments, the Commission could impose a fine of up to 10% of E.ON’s total turnover, without formally having to prove violation of Competition rules.

This investigation and decision follows inspections by Commission officials at the premises of electricity companies in Germany on 12 December 2006, which led to concerns that E.ON may have abused its dominant position on the German electricity wholesale market by withholding available electricity supply capacity with a view to raising electricity prices, and by deterring third parties from making new investment in electricity generation.  In a second aspect of the case there were concerns that E.ON may have abused its dominant position as a transmission system operator on the market for secondary balancing energy by favouring its own production affiliate, passing on increased costs to consumers and preventing competing power producers from other Member States from selling balancing energy into the E.ON balancing markets.

E.ON put forward proposals, and the Commission has made the commitment decision taking into account the results of the market test which was launched on 12 June 2008.

Another case in the German energy sector, this time gas, is following a similar procedure and has recently concluded the remedies consultation stage. RWE is dominant on the gas transport market(s) within its network area, and the Commission has concern that the company may have abused this dominant position by refusing to supply gas transmission services to third parties, and by behaviour aimed at lowering the margins of RWE’s downstream competitors in gas supply i.e. applying a margin squeeze. 

RWE is committing to divest its entire share of the German high-pressure gas transmission network, TSO Gas, which operates about a 4,000 km long network which runs through the German states of North Rhine-Westphalia and Lower Saxony.  The total long-range gas transmission system in Germany is around 40,000 kilometres, which is run by several companies including non-German companies.  Included in the divestment will be auxiliary equipment and intangible assets required to operate the transmission network e.g. software, contracts and licences.  RWE is also committing to supply gas to the network operator for a limited period of up to five years.  The divested business will have personnel, including key personnel, endowed to operate the network. 

The RWE press release dated 5 December 2008, states that this divestment will be to an independent third party.  RWE will remain a major player in the European energy sector, where it is ranked fifth in the electricity market and sixth in the gas market, according to its website.

Subject to the outcome of the remedies consultation, which closed on 5 January 2009, the Commission intends to adopt a commitments decision under Article 9, which if it has a similar time-line to the E.ON case will be around mid-2009.  RWE stated in its press release that it has complied with all legal requirements for its gas business, however in order to avoid protracted litigation, the Group has decided on a consensual approach and would like to work with the European Commission to bring proceedings to a close.

The European Commission has focused on the energy sector, with inspections of companies following the energy sector enquiry in 2007.  These two cases under Article 9 show the Commission is prepared to require, and infrastructure operators and suppliers may feel compelled to make major divestments to deal with competition concerns.