More than one way to crack a nut - the role of legislation and competition regulation in energy market liberalisation

Liberalisation of the gas and electricity markets

In 1988 the European Commission published a far-reaching white paper calling for the liberalisation of the gas and electricity markets within the EU. This was a huge change, as up to that point the national gas and electricity markets were dominated by vertically integrated firms and typically with local or regional monopolies. Wishing to compete on energy costs with North America, where gas market liberalisation had cut prices significantly, the Commission introduced draft liberalisation directives in the early 1990s. The key elements of these directives included:

• distinguishing clearly between competitive parts of the industry (e.g. supply to customers) and non-competitive parts (e.g. operation of the networks);
• obliging the operators of the non-competitive parts of the industry (e.g. the networks and other infrastructure) to allow third party access to the infrastructure;
• opening up the supply side of the market (e.g. remove barriers preventing alternative suppliers from importing or producing energy);
• gradually eradicating any restrictions on customers from altering their supplier;
• introducing independent regulators to oversee the sector.

The directives hit huge resistance from some of the EU member states, however, they were finally adopted in the electricity and gas markets in 1996 and 1998 respectively. The directives as adopted were considerably weakened from their original drafts, particularly in terms of unbundling – the separation of competitive and non-competitive parts of the business. The original draft directives had called for the complete ownership unbundling of energy transportation and supply businesses, so that former monopolies would be broken up into separately owned companies to transport energy and to sell it to customers. The intention was to facilitate effective supply competition and to prevent transportation companies discriminating in favour of their supply affiliates. In practice the actual level of unbundling required was much lower, particularly in gas, where the minimum standard was merely unbundled accounts, which might stop cross-subsidies between affiliates but not much else.

The Accelerated Liberalisation Directives

Following the first steps at liberalisation, the second liberalisation directives came into force in 2003 and were to be undertaken as national laws by the member states in 2005. Sometimes referred to as the accelerated directives, these revisions had stronger measures, including making all gas and electricity consumers within the EU eligible for competitive gas supply by 2007 (with the exception of derogated markets such as gas in Finland, Greece and Portugal). The accelerated gas directive also called for management unbundling of gas businesses, i.e. gas transporters should have separate management, IT systems etc from gas suppliers, but can still be owned by the same parent company. Although better than account unbundling, management unbundling has still had a limited effect on changing the culture of European gas companies.

The third liberalisation package: “completing the internal energy market”?

In September 2007 the European Commission published its third energy liberalisation package which was headlined as “completing the internal energy market”. The key proposal and most controversial one called for the full ownership unbundling of energy transportation and supply businesses, turning full circle to the Commission’s original proposals in the early 1990s, although there was also the possibility of opting for an independent system operator system, whereby the gas supply company retained ownership of the transportation assets, but the transportation company board had to be independently appointed and operated. The directive was adopted in July 2009, however, again in a weakened form, with a greater role for the gas supply company in appointing board members and overseeing investment and management plans.

So has it worked? What next for the European Commission?

Over the years there has been much debate and discussion on whether the EU’s liberalisation initiative has been successful or indeed necessary. It does seem clear that the liberalisation measures have been a success to some extent. Nominally at least, all customers in the EU have the legal right to choose their gas and electricity suppliers. Gas trading is developing strongly across key European hubs, particularly in the Netherlands and Germany. Gas supply competition is working for large customers in many EU states, even if domestic competition remains very limited in most states. However, there are concerns that the structural issues in the market remain, with incomplete unbundling, and weakened unbundling measures. The European Commission may not have got its way with the regulations for unbundling, but the alleged anti-competitive practice of many European gas companies has given the Commission another line of attack to drive unbundling. The Commission held a major Energy Sector Enquiry in 2005-07. Following on from this the Commission started competition actions against a number of major players. Under EU law the Commission has the power to impose huge fines for competition abuses, potentially up to 10% of a company’s global turnover over three years. Instead the Commission has been calling on companies to unbundle and sell off businesses – driving structural change – in return for settling cases out of court and waiving the potential fines.

Recent legal cases that have been covered in the press include the continued battle of the European Commission and E.ON. In 2009 E.ON was confirmed to be under investigation again on the grounds of alleged abuse over their dominant market position in the German gas market. This accusation stems from the allegation that E.ON Ruhrgas reportedly limited gas transport capacities by concluding long-term transmission contracts with E.ON Gastransport, the transmission company, resultantly obstructing competition.

This case was settled late in December 2009, when E.ON Ruhrgas agreed with the Commission to sell some of the gas it receives under long-term contracts directly into the market to encourage competition. Subject to a market test by the Commission, the investigation into E.ON Ruhrgas will be ended. Part of this deal will include E.ON reducing long-term bookings it makes through its transport subsidiary E.ON Gastransport (EGT) by 54% in two steps. It is long-term supply contracts such as these that have been under the scrutiny of the EU Commission recently, due to the perceived ambiguous effects on the competitive structure, investment and consumer welfare in the long-term.

Previously E.ON has been involved in a number of other competition enquiry cases and antitrust lawsuits with the EU commission and national governments. Other recently reported cases include the enforced sale of E.ON’s German power grid to settle a probe into the power of former energy monopolies, which the EU have maintained still dominate the value chain from import and production through to the end customer. While, elsewhere E.ON Ruhrgas have sold Thuega a utility network, in order to intensify free gas trading and thus stimulate competition.

Aside from incumbent monopolies blocking key entry points to pipelines; other errors of concern for the EU have been the blocking of the gas storage market and the share buying activities of large utilities’ whom have been purchasing shares in local utility groups.

In a similar case to this of E.ON’s, RWE had to sell their German gas transmission grid to avoid an antitrust fine from the EU. Elsewhere ENI have also introduced structural changes to increase competition in the Italian gas market, in order to settle an EU probe. This has seen ENI agree to sell international pipelines, worth an estimated 1.5 billion Euros. This effectively means ENI will have to sell transportation capacity in Transitgas, TENP pipelines and its TAG pipeline to a public entity.

If this proposal for ENI’s structural changes is accepted this would make ENI the fourth energy company to have been partially unbundled by the Commission due to the regulator’s charges of abusing a dominant market position, E.ON, RWE and GDF Suez being the other firms regulated. This gradual process of market liberalisation appears to be seeing some progress if not slow; however the debates over the need for such an initiative are likely to continue for some time yet.

EU liberalisation and regulation remain live issues. For an indepth look at these questions try MJMEnergy’s EU gas markets course on 8-9 March, EU electricity markets on 10-11 March, and 21st Century Regulation 22-24 March, at Said Business School, Oxford, UK. For more information visit www.mjmenergy.com