CEPI Seminar: Energy – Balance of Power Brussels 30 November 2005

Has the market liberalisation delivered?

Augustijn van Haasteren DG Competition, Energy and water unit

Outline

   Energy liberalisation:    Where do we come from?

The objectives The instruments  Legal framework  Competition law enforcement Sector inquiry  Context and starting point  First issues  Electricity  Gas What is next?

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Liberalisation: where do we come from?

 Network industry (natural monopoly)  Exclusive rights  Horizontal segmentation  Vertical integration of network and sales 3

Liberalisation: the objectives

 Aim: creation of an integrated and competitive market  Why integration?

 Competition on the supply side    Competition on the demand side: “market opening” Ensuring effective, transparent and non-discriminatory third party access (‘TPA’) to infrastructure Instruments:   Regulatory framework Competition law instruments 4

Liberalisation: legal framework(1)

  1st stage: 1996-2003  first Electricity Directive (1996)  first Gas Directive (1998) Ingrediënts:     elimination of exclusive rights gradual “market” opening choice between regulated TPA and negotiated TPA for access to networks challenging vertical integration: accounts unbundling 5

Liberalization: legal framework (2)

   2nd stage : 2003 Acceleration package Improved ingredients :      accelerated market opening  1st July 2004, for non-households  1st July 2007, for households regulated access to transport and distribution networks regulated or negotiated access to storage capacities management and legal unbundling obligatory sectoral regulator Late and minimalist implementation 6

Liberalisation: competition law (1)

  Instruments:    Anti-trust law (Articles 81, 82 and 86 EC) Merger control Sector inquiries Complements liberalisation aim:      Abolishing barriers to supply competition Allowing effective customer choice Complementing TPA enforcement Formation of national champions Elimination of entrants 7

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Liberalisation: competition law (2) Anti-trust law

Supply competition:   Territorial restrictions (TR) in the gas sector (Gazprom & Sonatrach) Joint sales practices in the gas sector (Norwegian GFU, Duc/Dong) Customer’s choice   Long term agreements that give rise to foreclosure: Pending cases in Belgium (EU) and Germany (BKA) Access to networks:   “Marathon” cases: TPA commitments Focus on interconnectors: e.g. capacity allocation UK-France 8

Liberalisation: competition law (3) Merger control

 Remedies to promote liberalization. e.g. EdF/EnBW.  EDF agreed to make available to competitors 6,000 MW located in France in VPP  EDF withdraws from CNR and WATT  Strict control of mergers between electricity and gas incumbents.  R ecent prohibition decision EDP-GDP-ENI 9

Sector inquiry (1): Context

 Implementation report – sector inquiry  Pro-active competition policy 10

Sector inquiry (2): Starting points

 Indications of market rigidities  Price increases & weak competitive pressure  Highly concentrated market structure  Slow market integration; i.e. relevant markets remain national  High barriers to entry; few new entrants  Consumer complaints 11

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Electricity Issue 1: Market concentration

The level of concentration in generation is high in many countries creating scope for market power for incumbent operators.

The generators, due to the characteristics of the electricity markets, are able to influence prices by the use of generation capacity available to them.

Whilst the level of concentration on observable wholesale markets (power exchanges and trading platforms) is less striking, no conclusion can at this stage be drawn about the satisfactory functioning of these markets.

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Electricity Issue 2: Vertical foreclosure

    A high degree of vertical integration between generation and supply leads to illiquid wholesale markets. Long term power purchase agreements between independent power producers and incumbent operators can have similar effects. Illiquid wholesale markets are a significant obstacle for new entrants. Inadequate unbundling between network and supply activities undermines new entry.

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Electricity

Issue 3: Insufficient market integration

    Interconnectors are key for market integration Long term capacity reservations (grand fathering) and inadequate capacity allocation rules are barriers to efficient market integration (However, recent ECJ ruling) Incentives to increase capacity. Unless more efficient use of revenues is available, congestion fees should be ringfenced with the view to using the revenues for reinforcing the existing interconnectors. Reduction of administrative burdens to build new interconnectors is important. 14

Electricity Issue 4: Transparency

 Lacking transparency on wholesale markets is a barrier for entry and does not provide for a level playing field for electricity trading.

 83% of suppliers, traders and generators believe that useful, important or indispensable information is lacking. 15

Electricity Issue 5: Prices

  Trust in functioning wholesale markets, which is crucial for the success of the liberalisation exercise, is currently lacking. Large energy consumers do not believe that prices on wholesale markets are resulting from fair competition.

Co-existence of regulated and free market prices cause distortions.

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Gas Issue 1: Market concentration

    The level of concentration remains very high in most national gas markets.

Market entry at wholesale level is limited by the incumbents’ control of gas import contracts. Some incumbents also control indigenous gas production.

Import contracts are typically flexible as to volumes, reducing incumbents’ need to trade gas. Most contracts are of very long duration with 15-20 years being typical.

Control over the gas available within nearly all national markets is thus highly concentrated to the benefit of the historical incumbents.

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Gas Issue 2:Vertical foreclosure

     Vertical integration and limited sales by incumbents on gas hubs result in low liquidity on wholesale gas markets that hinder new entry.

Despite the unbundling requirements of the EU gas directive, new entrants believe that network operators continue practices favouring the related supply company (IT, commercial info) Long term contracts between importers and customers lead to foreclosure in certain geographic markets (B, D). Other barriers to entry dominate in other markets (such as storage). Persistent allegations of abusive behaviour that inhibits switching opportunities.

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Gas Issue 3: insufficient market integration

   Clauses in import contracts dating from pre-liberalisation times have contributed to market segmentation (UIOLI).

Access to cross-border pipelines and entry points to national gas systems are key factors for market integration. The main reason that access to import pipes is limited is the preferential treatment of pre-liberalisation contracts. Within the current framework of these contracts there seems to be scope for optimisation of the use of the pipelines.

Swaps can substitute physical transport of gas and can offer some solutions to congestion problems. However, they will generally tend to favour the incumbents. 19

Gas Issue 4: Lack of transparency

 Increased transparency about access to networks is vital. Information is notably lacking for cross border pipelines and entry points into national markets 20

Gas Issue 5: Prices

 Prices in most long term supply contracts are currently linked to oil or oil derivatives. No trend towards more market based pricing is observable. The price indexes in long term contracts between gas producers and importers are similar across Europe.

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Conclusion

Has the market liberalisation delivered?

We can certainly do better!

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What’s next

 DG Competition/sector inquiry:  Public presentation of preliminary report: 16 February 2006, followed by public consultation  Final report: second half 2006  Expect anti-trust enforcement to start in parallel  DG Transport and Energy  Will investigate effectiveness of legislative and regulatory measures 23

More information

 DG Competition website:  www.europa.eu.int/comm/competition/antitrus t/others/sector_inquiries/energy/ DG Transport and Energy website:  www.

europa.eu.int/comm/energy/electricity/re port_2005/index_en.htm

/ Questions/comments: [email protected]

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Thank you for your attention

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