Competition in the energy sector

17 September 2010

Jeremy Robinson

Since the European Commission published its final report on the energy sector competition inquiry in January 2007, several energy companies have been targeted for investigation into suspected infringements of Article 102 of the Treaty on the Functioning of the European Union (“TFEU”). We discuss four recent cases below.  These cases illustrate the Commission’s readiness to accept binding commitments from the energy companies to conclude investigations under Article 9 of Regulation 1/2003 instead of proceeding to full scale infringement decisions.

Sector inquiry

In June 2005, the European Commission launched a sector inquiry into competition in the gas and electricity markets. The final report, which was published in January 2007, confirmed the existence of serious competition problems in the market, such as:

  • high levels of market concentration;

  • vertical foreclosure;

  • an absence of transparency;

  • too little cross-border trade; and

  • distrust in the pricing mechanisms.

To tackle these problems, the Commission launched several investigations into possible violations of the competition rules (anti-trust, merger control and state aids) by individual energy companies.

Commitment decisions (Article 9 of Regulation 1/2003)

Under Article 9 of Regulation 1/2003, where the Commission intends to adopt a decision requiring an infringement to be brought to an end, the undertaking(s) concerned may offer commitments to meet the Commission’s concerns.  These commitments are made legally binding by a “commitment decision” of the Commission, after which the Commission can then close its investigation without having to reach a final conclusion on whether the undertaking has actually infringed either Article 101 or 102 TFEU. Commitment decisions are effectively a formal type of settlement, which allow the Commission to resolve cases efficiently and the undertaking to avoid a fine for breaching competition law. However if the company concerned breaches the commitments, the Commission may impose a fine of up to 10% of that company’s turnover, without needing to demonstrate an infringement of Article 101 or 102.

We summarise the EU commitments cases in the energy sector from the last six months.  The Commission will not always find that a case can be resolved by commitments, but it is clear that the Commission does consider that the alleged abuse of dominance situations in the energy sector can in principle be resolved this way.  Consistent with its energy liberalisation policy, the Commission is placing a premium on solutions that facilitate market opening rather than seeking to impose fines.  These cases demonstrate how “big picture” energy policy and competition enforcement go hand-in-hand.

E.ON

Most recently, on 4 May 2010, the Commission accepted binding commitments offered by the German gas company E.ON. The Commission was concerned that E.ON had abused its dominant market position for the supply of gas in Germany by foreclosing the market by making long-term bookings on its own gas transmission system. By reserving to itself almost the entire capacity at key entry points into the gas network, E.ON had prevented new entrants from gaining access to gas transport infrastructure, limiting their ability to supply customers connected to the E.ON grid and potentially hindering the development of competition in the downstream gas supply market.

To address the Commission’s concerns, E.ON undertook to release approximately 15% of the pipeline capacity at entry points to its gas networks by October 2010, increasing the possibility for other companies to compete on the German gas transmission market. From October 2015, E.ON will further reduce its bookings of entry capacity in the NetConnect Germany grid to 50% and in E.ON's grid for low-calorific gas to 64% of the pipeline capacity.

Svenska Kraftnat

On 14 April 2010, the Commission accepted binding commitments from the Swedish State-owned electricity transmission operator Svenska Kraftnat (“SvK”).  The Commission was concerned that SvK had abused its dominant position on the Swedish electricity transmission market by reducing the interconnector transmission capacity available when it anticipated internal congestion within the Swedish transmission system. The Commission considered that this conduct discriminated between domestic and export electricity transmission (without objective justification) and segmented the internal electricity market.

To settle the Commission’s concerns, SvK committed to subdivide the Swedish transmission system into two or more bidding zones and operate the system on this basis by November 2011 at the latest. The configuration of the zones will be flexible to allow adaptation to changes in the future flow patterns in the Swedish transmission system. Once the bidding zones become operative, SvK will manage transmission congestion without limiting trading capacity on interconnectors.  The use of bidding zones is expected to allow electricity trading to adjust to effectively-available transmission capacity through market prices, rather than placing limitations on interconnector trading capacity. 

Congestion in a section of the network referred to as the West-Coast-Corridor will be excluded from the new system owing to a lack of sufficient generation resources in this area. However SvK has committed to build a new 400kV transmission line in the West-Coast corridor by 30 November 2011.

Finally, until the bidding zones become operative, SvK will (as a transient measure) increase the use of counter-trade to limit capacity reductions on interconnectors during periods of congestion.

EDF SA

On 17 March 2010, the Commission accepted commitments offered by French electricity supplier EDF SA. The Commission was concerned that EDF was abusing its dominant market position for the supply of electricity to large industrial customers. Specifically, the Commission regarded EDF as foreclosing the market through the use of long term electricity supply contracts which included restrictions on resale. The Commission considered that these practices hindered the entry of alternative suppliers on the French market and decreased liquidity in the wholesale market, delaying the effective liberalisation of the electricity market in France.

EDF has committed to make an average of 65% of the electricity it contracts to large industrial customers available for recontracting by alternative suppliers over the 10-year term of the commitments. Also, EDF will not conclude any new contracts which exceed five years’ duration and must offer large industrial customers a non-exclusive contract, allowing them to source electricity from other suppliers. This will give alternative suppliers the opportunity to compete with EDF and expand on the market.

EDF will also abolish resale restrictions in its supply contracts, and where required will facilitate the resale of electricity. This will enable customers to manage their electricity supplies more easily and with greater flexibility, and will encourage the liquidity of the French wholesale market.

ENI

On 5 March 2010, the Commission issued a consultation notice on Italian energy company ENI’s proposed commitments to address the Commission's concerns that it may have foreclosed competition in the Italian gas supply market by: (i) refusing to grant competitors access to capacity available on the transport network; (ii) granting access in an impractical manner; and (iii) strategically limiting investment in ENI's international transmission pipeline system.  To address the Commission’s concerns, ENI proposed to divest its shares in three international transport pipelines in Austria, Germany and Switzerland. The purchasers must not themselves raise competition concerns, and if no binding sale agreements were reached by an agreed date, a divestiture trustee would be appointed not subject to any minimum price.

Comment

All of the above cases arose in consequence of the Commission’s 2005 energy sector inquiry. The inquiry gave the Commission a valuable insight into the functioning of the electricity and gas markets, allowing the Commission to better assess the threats to competition and to take a targeted approach where competition enforcement action was appropriate to address the most serious concerns identified.

As the commitments procedure is undertaken with the co-operation of the companies involved, the Commission is able to resolve identified problems comparatively quickly. In addition, use of the commitments procedure will in some circumstances allow the Commission to extract remedies that are wider in scope and effect than if the Commission instead adopted a full infringement decision fining the abusing company and forcing it to take remedial action.

The Commission has stated that large gas and electricity companies are now very much aware that the spotlight is on them, and that by highlighting the serious competition issues in the market the sector inquiry has led to improved behaviour by the main players.