Federal Supreme Court blocks further shareholding in regional suppliers by market-dominant energy producers

23 January 2009

Dr Jörg Witting, Fabian von Busse

The Federal Supreme Court has confirmed the decisions of the Düsseldorf Higher Regional Court  and of the Federal Cartel Office which prohibited the acquisition of a 33.3% share in municipal supplier Stadtwerke Eschwege by German energy producer E-ON.

In its first decision since the liberalisation of power trading in Germany in 1998, the Federal Supreme Court held that effective competition still does not exist in Germany in the electricity distribution market. According to the Federal Supreme Court, the two large German energy producers E-ON and RWE form a market-dominant duopoly without relevant competition and without remaining producers such as Vattenfall and EnBW being able to establish considerable competitive pressure against the duopolists. In Germany, more than 60% of electricity supplied to end-users is produced by E-ON or RWE.

The Federal Supreme Court supported the findings of the Federal Cartel Office, which found through its market assessment that the production and distribution of electricity must be considered separately. The Court also agreed with the Federal Cartel Office that substantial changes had taken place in electricity distribution.  For example, the market comprises not only regional and municipal distributors, as stated in previous findings, but also a multitude of independent distributors and traders and also energy producers through their vertically-integrated subsidiaries interacting with each other and other end-users.

However, this changed market structure has not led to more effective competition. According to the Court’s findings, market-dominant players in electricity generation are also dominant in electricity distribution, as electricity is not storable and electricity distributors therefore depend on the electricity producer’s supply, in particular when distributors do not have their own electricity production capacity.

In its competitive assessment, the Federal Supreme Court stated among other things that the low transmission capacity of cross-border transfer points – which are operated by the energy producers – hampered electricity imports into Germany (less than 10% of the total volume) and deterred foreign energy producers from entering the German market. Accordingly the Federal Supreme Court confirmed the German Federal Cartel Office’s market definition, which considered the markets for electricity distribution as national. The parties to the concentration had pleaded for a Community-wide market definition.

Furthermore, the Court argued that RWE’s and E-ON’s strategy was to protect their sales regions by acquiring minor interests in regional and municipal suppliers and other energy distributors. Currently E-ON and RWE hold shares in 204 of about 900 local energy distributors in Germany (EnBW and Vattenfall: 35). Further participations, in the view of the Court, would lead to further restriction of competition. E-ON or RWE are the main energy suppliers for almost 70% of the local suppliers in which they hold interests.

The Federal Supreme Court agreed with the Federal Cartel Office that, despite the minor share in the local supplier Stadtwerke Eschwege, it was to be expected that in future E-ON’s interests as a shareholder of Stadtwerke Eschwege would increasingly be taken into account by Stadtwerke Eschwege. The Court concluded that E-ON’s already market-dominant position was further reinforced, discouraging possible competitors from competing with E-ON for new supplier contracts and enabling E-ON to improve its offers to meet competition.

With its decision, the Federal Supreme Court agreed with the Federal Cartel Office’s conclusion that a Community-wide market definition, as proposed by the parties, was not sustainable, and that further vertical integration of market-dominant players should be prohibited. It can be expected that the Federal Cartel Office will assess such vertical concentrations even more rigidly in the future.

On 12 November 2008, the day after the Federal Supreme Court decision, E-ON announced that it was contemplating selling its 100%-subsidiary Thüga AG, a highly vertically integrated German electricity and gas supplier whose 110 German subsidiaries achieved an aggregate turnover of 15.5 billion Euros in 2007. The Federal Cartel Office expressly welcomed this announcement.