Italian competition authority investigates suspected abuses in Italian electricity balancing markets

18 October 2016

Peter Willis

The Italian competition authority, the AGCM, has opened investigations into suspected infringements of the competition rules by energy companies Enel and Sorgenia. It suspects that each of the operators may have separately adopted a strategy of withholding its output from the day-ahead electricity market, knowing that it would then be paid significantly more by the Italian electricity transmission system operator Terna to provide voltage support in the ancillary services market. Interestingly, the investigation results from a referral by the Italian energy regulator, which had already opened an investigation into possible energy market manipulation under REMIT, Regulation 1227/2011 on wholesale energy market integrity and transparency. Similar investigations (whether under REMIT or the competition rules) seem likely to increase in number, as transaction reporting in accordance with the requirements of REMIT provides ever-greater quantities of market data for the regulators to analyse for pricing anomalies. Transmission system operators should consider the possibility of recovering amounts overpaid in such circumstances, and generators should ensure that their compliance programmes highlight the risks of withholding strategies, notwithstanding the attraction of earning higher revenues from ancillary services in periods of falling wholesale electricity prices.    

Background

On 6 October 2016, the Autorità Garante della Concorrenza e del Mercato (AGCM), the Italian competition authority, announced that it had opened an investigation under Article 102 TFEU into two electricity generators, Enel and Sorgenia, and that it had carried out on-site investigations at their premises. Both companies own power stations near Brindisi, in Southern Italy: Enel four units of a coal-fired power station and Sorgenia a combined cycle gas turbine (CCGT). The Italian energy regulator, the AEEGSI, notified the AGCM of concerns about the bidding practices of the two generators, into which it had already opened investigations under REMIT, Regulation 1227/2011 on wholesale energy market integrity and transparency.

In a fairly short initial analysis, the AGCM noted that at certain times, the output from the two plants is necessary in order to provide voltage support in the area of Brindisi.  Although their operators have traditionally offered the two plants in the day-ahead market and run them accordingly, between 27 March and 15 June 2016, their position at the close of the day-ahead market was essentially zero. This seems to have been due in part to a reduction in prices in energy markets, and in part to the adoption of strategies of withholding in the day-ahead market – either physical (by not offering their plants) or economic (by offering their plants at prices higher than the market price). The AGCM makes no allegation of collusion between Enel and Sorgenia.  Sorgenia did not offer its plant at all in the day-ahead market on certain days. Enel started to offer its plant, initially at weekends and then on weekdays too, at prices higher than those previously offered, across the entire range of the plant, including at its technical minimum.  In certain cases, it withheld its plant from the day-ahead market. In others, it bought back in the intraday market the energy that it had sold in the day-ahead market, so that it would not need to run. With little or no output from these plants resulting from the day-ahead market, Terna was forced instead to accept offers from the two generators in the ancillary services market, in order to ensure secure system operation. The AEEGSI found that the cost of procuring ancillary services in the Brindisi region in the first 6 months of the year was around €320 million higher than in the corresponding period in the previous year.

Market definition

The AGCM first reviewed the relevant markets.  The wholesale electricity market consists of electricity traded through bilateral contracts and on the power exchanges, in the day-ahead and intraday market. The ancillary services market (the MSD) is divided into two timeframes: the ex ante MSD, where Terna procures the necessary resources to resolve network constraints within each zone, to constitute adequate reserve capacity margins and to maintain voltage levels, and the real time balancing market (MB), where Terna procures the resources to maintain the balance between supply and demand and to maintain reserves. The initial view of the AGCM was that the ex ante MSD and the MB are distinct markets in competition terms. Within the ex ante MSD market, there may be distinct product markets for specific services – in this case the provision of minimum generation.  In these markets, a single producer may have a high market share. In certain circumstances, the demand in hours of low load may be met by coal-fired plants, which are incompatible with intraday firing and shut-down cycles.    

Dominance

The AGCM noted that voltage support in the area of Brindisi can be provided only by the following plants: a plant owned by EniPower, which usually runs on the basis of the outcome of the wholesale market, Sorgenia's plant and Enel's 4 units. During periods in which only the EniPower plant ran in response to the energy markets, Terna as a rule required two units to run, from among the 4 Enel coal units and the Sorgenia CCGT. According to the AGCM, this made each of Enel and Sorgenia obligatory trading partners for Terna, and this was sufficient to consider that they might be dominant. In Sorgenia's case, Terna sometimes needed Sorgenia's CCGT to run in hours of low load, because its technical characteristics permitted intraday operation. In some situations, Sorgenia was therefore the only operator that could satisfy Terna's demand.

Abuse

The AGCM expressed concerns that Enel and Sorgenia might have used their positions as mandatory trading partners in order to impose excessive prices on Terna.  This appeared from a comparison with the prices charged by Enel and Sorgenia in the past for the provision of minimum generation (€80/MWh and €69/MWh respectively) and a comparison with the prices paid in the day-ahead market for the same commodity.The highest price paid to Sorgenia in the MSD during this period was €999/MWh and the highest price paid to Enel was €420/MWh – around 10 times higher than the average wholesale price in the region during the period.

The AGCM therefore launched a formal investigation, which is due to conclude by 30 May 2017. During that period, the parties will have an opportunity to make representations to the AGCM and to inspect the AGCM's file. 

Comment

The investigations are still ongoing, and there is therefore no certainty that the AGCM will in fact find an infringement of the competition rules at the end of it. At this preliminary stage, however, the investigations are interesting for a couple of reasons. Firstly, the AEEGSI had clearly carried out its own investigation into possible infringements of REMIT before passing the details to the AGCM to start a competition investigation. In fact it had already ordered the two companies to cease their bidding behaviour, and had passed details on to ACER and the European Commission under REMIT. These investigations go against the trend, in that one of the reasons for the introduction of REMIT was to provide a tool to tackle physical and economic withholding by generators, without the need to establish dominance, which had proved problematic in some competition investigations in the past. Investigations under REMIT would therefore be expected to replace competition investigations in this area. Interestingly, the first fine imposed for market manipulation under REMIT, earlier this year, resulted from an investigation by the Spanish competition and markets authority, the CNMC, into Iberdrola's withholding of hydroelectric generation in order to increase prices. We reported on it here. The CNMC had previously adopted a number of decisions under Article 102, similarly fining companies for withholding generation. However, it had then lost on appeal, and its pioneering use of REMIT for a similar case was therefore significant. Secondly, these two investigations raise very similar issues of market definition to those examined in some detail in a 2012 decision of the AGCM, also involving the withdrawal of generators from the Italian wholesale markets in order to earn greater revenues in the MSD, which we reported here. In that case, the AGCM found that the companies concerned had engaged in a highly sophisticated collusive arrangement to allocate amongst themselves contracts awarded by Terna to provide voltage support in the area of Naples.

As mentioned above, similar investigations (whether under REMIT or the competition rules) are likely to increase in number, as transaction reporting in accordance with the requirements of REMIT provides ever-greater quantities of market data for the regulators to analyse for pricing anomalies. Transmission system operators should consider the possibility of recovering amounts overpaid in such circumstances, and generators should ensure that their compliance programmes highlight the risks of withholding strategies, notwithstanding the attraction of earning higher revenues from ancillary services in a period of falling wholesale electricity prices.

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