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June 08 |
Issue # 40 |
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Breaking up German giants – E.ON and RWE agree to sell part of their transmission networks to settle antitrust claims With the introduction of our new longer format courses, and in particular the EU Gas Markets Liberalisation Course, we thought it would be relevant to talk about the interesting situation developing in Germany as RWE and E.ON and have announced plans to sell off parts of their transmission networks in order to settle the European Commission’s antitrust cases against them. Therefore Tim Madden and Nick White explore the issues surrounding the recent announcements. In March 2008 E.ON announced that it had agreed to sell its electricity grid, and some of its generating capacity, in return for the Commission dropping its claims against it. Although the company states that this is not an admission of guilt, it would appear that E.ON believes that this is its best option to prevent potentially very costly competition finds. Under EU legislation, E.ON could be fined up to 10% of its annual turnover if found guilty of competition abuses. On 1st June 2008, RWE followed suit, announcing that it had agreed to sell some of its gas transmission assets in the hope of settling the Commission’s claims against it. The back-downs by two of the largest energy utilities in Europe represent a major success for the Commission in its battle to effectively liberalise energy markets in Europe. Back in 1988 the European Commission published a white paper calling for gas and electricity market liberalisation in the EU. Twenty years later, practical liberalisation on the ground remains limited, particularly in the gas market, with effective gas supply competition only in the UK, and developing in the Netherlands, with most other EU states lagging far behind. In recent years the Commission has adopted a two-pronged approach to completing the internal market in energy, through moves for third energy liberalisation directive and through competition enforcement. The key measure in the proposed third energy liberalisation package published by the Commission in September 2007 is the full unbundling of transmission and supply businesses. This implies that major companies would be required to sell off their transmission assets (or their supply businesses). Political opposition to the Commission’s proposals has been led by Germany and France, suggesting alternative measures to promote competition while allowing energy companies, so-called ‘national champions’ to remain intact. However, the Commission appears to be using its competition powers to push through structural change, whether or not the new directive is approved. The competition issues spring from a wide-ranging competition enquiry started by the Commission in 2005. In its Findings documents published in January 2007, the Commission noted various barriers to entry that it claimed were stifling competition. In the meantime European Commission officers raided the offices of a number of major European utilities including E.ON, RWE, Distrigas, Gaz de France and ENI in the search for abuses of dominant market positions. That the Commission was prepared to act tough was proven by its decision earlier this year to fine E.ON €38m, not for competition abuse, but for breaking the Commission’s seal on a room at E.ON’s offices containing documents that the Commission believed might provide evidence of market abuse. It would appear that E.ON and RWE have seen the writing on the wall, and agreed to structural change in an attempt to avoid punitive fines. Where does this leave the German and French governments? German Chancellor Angela Merkel has stated that the Commission’s move will not guarantee competition. Merkel’s preference is to keep the responsibility of Germany’s power generation within the four big utilities in Germany (E.ON, RWE, EnBW and Vattenfall), and for them to keep their networks. However, now that the two largest energy companies in Germany have voluntarily agreed to surrender at least part of their networks, it may be harder for the Commission’s political opponents to resist its current liberalisation drive. Nevertheless, whether or not the EU can agree on a further energy market liberalisation package, the expectation is that further structural changes are likely as the Commission continues to pursue its competition cases against various major European gas companies. Parallels exist with the Marathon case of the early 1990s which the Commission used to extract concessions to market liberalisation from companies such as Gasunie (now GasTerra), Ruhrgas (now E.ON), and Thyssengas (now RWE Gas) including the introduction of entry-exit systems in the early 2000s, despite the fact that Marathon had settled its claims out of court years earlier. The distribution network E.ON plans to sell consists of various stations generating up to 4,800 megawatts, as well as transformers and 10,000 kilometres of high tension lines across Germany, the company buying must not be an electricity firm, the business would make its revenue from charging for the use of the lines. E.ON will also sell some generating capacity including varying coal-burning power plants, and fixed-price rights to two of their German nuclear sites. The deal with the EU seems to stipulate that E.ON are to sell their generating capacity within one year and their network grid within two years. The electricity transmission network to be sold to an operator with no interest in generation could fetch up to 1 billion Euros, although this price could be affected by the suggestion that the German regulators are tightening up their grip on the fees on which the operators can charge. National Grid, and French controlled Dalkia have been linked to the purchase of the network, however German competitors EnBW and RWE can be ruled out of the equation as they are generators, but as of yet there have been no concrete bids. E.ON’s generating assets are said to be potentially worth several billion euros, though this depends on the age of the assets and whether they were nuclear or coal plants. People in the industry believe there is little point in E.ON fighting the sale of their assets due to the regulatory pressure and lower returns from their assets, they might as well invest their money else where in non-regulated assets. RWE’s decision to sell part of its gas transmission grid, which is still subject to approval by its supervisory board, appears to relate to accusations of competitive abuse in the North Rhine-Westphalia network that it operates. Further details have not yet been released. It will now be interesting to see if the Commission’s encounters with E.ON and RWE have set precedents for other large firms’ downfalls; the Commission’s ruthless approach seems set to ruffle a few more dominating firms’ feathers. With Neelie Kroes, the EU Competition Commissioner, wielding the investigative axe and further backing E.ON into a corner persuading them to be unbundled, the 27 EU member states seem to be entering an interesting time as they attempt to preserve their national champions. There is no doubt that the EU will continue to up the pace of this contest in attempt to push an open market which would further competition and reduce consumer prices. The electricity networks seem set to go first, as gas companies are more reliant on their networks and could prove more difficult to break up. A further concern of the gas networks could be gas giant Gazprom’s continual dominance of the European markets, as they could purchase newly separated pipelines and could buy further power and energy supply dominance. Ultimately another factor may come into play. Evidence from the UK suggests that unbundling may actually be the best way forward for formerly integrated transmission and supply businesses themselves. The former British Gas plc was broken up in January 1997 to form Centrica plc, focused on the British Gas supply business, and BG plc, then focusing on gas transportation and exploration and production. Analysis of the share prices and productivity of British Gas plc’s successor companies, suggests that unbundling, although driven by regulatory pressure, may have been the best thing that happened to these companies since market liberalisation began in earnest in 1990. Perhaps European utilities should embrace unbundling rather than resist it. MJMENERGY’s EU Gas market liberalisation course is on 17 and 18 June at Templeton College, Oxford. For more information visit www.mjmenergy.com for more details |
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