EU energy inquiry – final report confirms serious competition problems

The European Commission has today (10 January 2007) announced the final conclusions reached in its competition investigation into the energy sector, which was launched in June 2005. Commissioner Neelie Kroes was unrepentant that the report “will make uncomfortable reading for many energy companies”.

The main conclusions are that there is:

• too much market concentration in most national markets;
• too little liquidity, preventing successful new entry;
• too little integration between EU states’ national markets;
• an absence of transparently available market information leading to distrust in pricing mechanisms;
• possible collusion between incumbents, designed to share markets;
• insufficient investment in infrastructure;
• a problem with customers being tied to suppliers through long-term downstream contracts.

Vertical integration of supply, generation and infrastructure is also found to be a pressing concern, as vertically integrated companies’ knowledge of generation capacity and infrastructure issues gives them an incentive to prefer their own supply companies to the detriment of competitors. While the Commission has stopped short of proposing structural unbundling (the effective separation of ownership between the monopoly electricity and gas networks and commercial activities elsewhere in the value chain), its view is that “ultimately, the most effective way to remove the incentives for network companies to favour their own commercial activities is to remove the ownership link”, so vertically integrated companies should take note.

The Commission now intends to pursue individual anti-trust cases on the basis of its findings; indeed some investigations have already been launched. In May 2006, the Commission began investigations into possible foreclosure of wholesale markets and infrastructure by incumbents and into collusion leading to market sharing. In December 2006, electricity generators and suppliers in Germany were the subject of competition investigations by the Commission regarding suspect practices on the wholesale and balancing markets. The Commission has stated that it will focus on cases that remove obstacles to market entry.

Market concentration concerns will be highlighted in any future energy sector mergers examined by the Commission. State aid rules will be rigorously applied when the Commission believes state subsidies contribute to maintaining concentrated markets and prevent market liberalisation.

The Commission has also proposed a raft of regulatory changes and has mooted the idea of a single EU regulator for the sector.

Further details of the Commission’s findings are available here. The Commission’s FAQs on today’s report are available here. Click here for the full text of the report.