Federal Supreme Court approves Federal Cartel Office’s requirements for long-term gas supply contracts

06 May 2009

Dr Jörg Witting, Fabian von Busse

In a further step to open up the German energy distribution market the Federal Supreme Court has approved the requirements stipulated by the Federal Cartel Office for long-term gas supply contracts between E.ON Ruhrgas (Germany’s dominant gas transmission company) and local and regional gas suppliers. These require that the term of gas supply contracts must not exceed (i) 2 years if more than 80% of the supplier’s demand is covered and (ii) 4 years if 50-80% of the supplier’s demand is covered. Additionally, E.ON Ruhrgas cannot combine various contracts, if added together they cover 100% of supplier’s demand, even where each individual contract meets the requirement.

E.ON Ruhrgas is part of the German energy provider E.ON group, which had a turnover of approximately EUR 68.7 billion in 2007. According to the Federal Supreme Court, E.ON Ruhrgas is by far Germany’s largest gas transmission company, with 75% of the gas distribution market to local regional suppliers, and with more than 11,000 kilometres of pipelines and shareholdings in 30% of local and regional gas suppliers.

The Court stated that the German gas market consists of three levels: the first level comprises international gas transmission companies with own exploitation resources such as E.ON Ruhrgas. On the second level are gas transmission companies, without exploitation resources, which purchase gas from first level companies. The third level comprises approximately 700 local and regional gas suppliers providing gas to private households and small companies. E.ON Ruhrgas has concluded long-term (the Federal Cartel Office found that terms of 4-20 years are usual) gas supply contracts covering up to 100% of the supplier’s demand.

In its decision of January 2006, the Federal Cartel Office ordered that E.ON Ruhrgas had to terminate these contracts by 30 September 2006, and stipulated the above requirements for future contracts to be closed by E.ON Ruhrgas and limited their term to 30 September 2010. In its decision of 10 February 2009, the Federal Supreme Court confirmed the Federal Cartel Office’s decision that had already been approved by the Düsseldorf Higher Regional Court.

The Federal Supreme Court pointed out that the system of long-term supply contracts led to a market foreclosure of E.ON Ruhrgas’ competitors and the mere termination of these contracts would not be sufficient to ensure the market opened up. Therefore it was necessary to stipulate clear rules, for a limited period of time, to apply to future gas supply contracts. The Court expressed concerns that without the rules set by the Federal Cartel Office, E.ON Ruhrgas would re-enter into a bundle of similar contracts with local and regional gas suppliers with the effect of foreclosing the market again.

The Court highlighted the prohibition of combining contracts, which individually are acceptable, where such combination leads to an infringement of the requirements set by the Federal Cartel Office for contract terms and volumes. This means that E.ON Ruhrgas cannot enter into an agreement covering 20% of the supplier’s demand if it has already concluded a contract covering 80% of the demand even if the latter contract meets the Federal Cartel Office’s requirements. Without this additional restriction, the opening up of the market could not be achieved as E.ON Ruhrgas would have considerable cost advantages and thus foreclose competitors for the remaining volume. The Federal Supreme Court found possible advantageous offers by E.ON Ruhrgas acceptable for a transitional period to ensure the opening up of the long-term market.

With this recent decision, the Federal Supreme Court has re-affirmed its standpoint that the E.ON group is in a dominant market position in relation to regional and local energy suppliers. In November 2008, the Federal Supreme Court had blocked E.ON group holding further minority shareholdings in local and regional energy suppliers.

Source: http://www.bundesgerichtshof.de, http://www.olg-duesseldorf.nrw.de,  http://www.bundeskartellamt.de