Has the market liberalisation delivered?

Augustijn van Haasteren Augustijn van Haasteren DG Competition, Energy and water DG Competition, Energy and water

unitunit

Has the market Has the market liberalisation liberalisation

delivered?delivered?

CEPI Seminar: Energy – Balance of PowerBrussels 30 November 2005

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OutlineOutline Energy liberalisation: Energy liberalisation:

Where do we come from?Where do we come from? The objectivesThe objectives The instrumentsThe instruments

Legal frameworkLegal framework Competition law enforcementCompetition law enforcement

Sector inquirySector inquiry Context and starting pointContext and starting point First issuesFirst issues

ElectricityElectricity GasGas

What is next?What is next?

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Liberalisation: where do we Liberalisation: where do we come from?come from?

Network industry (natural Network industry (natural monopoly)monopoly)

Exclusive rightsExclusive rights Horizontal segmentationHorizontal segmentation Vertical integration of network and Vertical integration of network and

salessales

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Liberalisation: the Liberalisation: the objectivesobjectives

Aim: creation of an integrated and competitive Aim: creation of an integrated and competitive marketmarket

Why integration?Why integration? Competition on the supply sideCompetition on the supply side

Competition on the demand side: “market Competition on the demand side: “market opening”opening”

Ensuring effective, transparent and non-Ensuring effective, transparent and non-discriminatory third party access (‘TPA’) to discriminatory third party access (‘TPA’) to infrastructureinfrastructure

Instruments:Instruments: Regulatory frameworkRegulatory framework Competition law instruments Competition law instruments

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Liberalisation: legal Liberalisation: legal framework(1)framework(1)

1st stage: 1996-20031st stage: 1996-2003 first Electricity Directive (1996) first Electricity Directive (1996) first Gas Directive (1998)first Gas Directive (1998)

Ingrediënts:Ingrediënts: elimination of exclusive rightselimination of exclusive rights gradual “market” openinggradual “market” opening choice between regulated TPA and choice between regulated TPA and

negotiated TPA for access to networks negotiated TPA for access to networks challenging vertical integration: challenging vertical integration:

accounts unbundlingaccounts unbundling

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Liberalization: legal Liberalization: legal framework (2)framework (2)

2nd stage : 2003 Acceleration package2nd stage : 2003 Acceleration package Improved ingredientsImproved ingredients::

accelerated market openingaccelerated market opening 1st July 2004, for non-households1st July 2004, for non-households 1st July 2007, for households1st July 2007, for households

regulated access to transport and distribution regulated access to transport and distribution networksnetworks

regulated or negotiated access to storage regulated or negotiated access to storage capacitiescapacities

management and legal unbundlingmanagement and legal unbundling obligatory sectoral regulatorobligatory sectoral regulator

Late and minimalist implementationLate and minimalist implementation

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Liberalisation: competition Liberalisation: competition law (1)law (1)

Instruments:Instruments: Anti-trust law (Articles 81, 82 and 86 EC)Anti-trust law (Articles 81, 82 and 86 EC) Merger controlMerger control Sector inquiriesSector inquiries

Complements liberalisation aim:Complements liberalisation aim: Abolishing barriers to supply competition Abolishing barriers to supply competition Allowing effective customer choiceAllowing effective customer choice Complementing TPA enforcementComplementing TPA enforcement Formation of national championsFormation of national champions Elimination of entrantsElimination of entrants

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Anti-trust lawAnti-trust law Supply competition:

Territorial restrictions (TR) in the gas sector (Gazprom & Sonatrach)

Joint sales practices in the gas sector (Norwegian GFU, Joint sales practices in the gas sector (Norwegian GFU, Duc/Dong)Duc/Dong)

Customer’s choice choice Long term agreements that give rise to foreclosure: Long term agreements that give rise to foreclosure: PPending cases in Belgium (EU) and Germany (BKA)ending cases in Belgium (EU) and Germany (BKA)

Access to networks: Access to networks: ““Marathon” cases: TPA commitmentsMarathon” cases: TPA commitments Focus on interconnectors: e.g. capacity allocation UK-Focus on interconnectors: e.g. capacity allocation UK-

FranceFrance

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Merger controlMerger control Remedies to promote liberalization. e.g. Remedies to promote liberalization. e.g.

EdF/EnBW. EdF/EnBW. EDF agreed to make available to EDF agreed to make available to

competitors 6,000 MW located in France in competitors 6,000 MW located in France in VPPVPP

EDF withdraws from CNR and WATTEDF withdraws from CNR and WATT Strict control of mergers between Strict control of mergers between

electricity and gas incumbents. electricity and gas incumbents. RRecent prohibition decision EDP-GDP-ecent prohibition decision EDP-GDP-

ENIENI

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Sector inquiry (1): ContextSector inquiry (1): Context

Implementation report – sector Implementation report – sector inquiryinquiry

Pro-active competition policyPro-active competition policy

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Sector inquiry (2): Starting Sector inquiry (2): Starting points points

Indications of market rigiditiesIndications of market rigidities Price increases & weak competitive Price increases & weak competitive

pressurepressure Highly concentrated market structureHighly concentrated market structure Slow market integration; i.e. relevant Slow market integration; i.e. relevant

markets remain nationalmarkets remain national High barriers to entry; few new High barriers to entry; few new

entrantsentrants Consumer complaintsConsumer complaints

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ElectricityElectricityIssue 1: Issue 1: MarketMarket concentrationconcentration

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

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

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

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ElectricityElectricity Issue 2: Vertical foreclosureIssue 2: Vertical foreclosure

A high degree of vertical integration A high degree of vertical integration between generation and supply leads to between generation and supply leads to illiquid wholesale markets. illiquid wholesale markets.

Long term power purchase agreements Long term power purchase agreements between independent power producers between independent power producers and incumbent operators can have similar and incumbent operators can have similar effects. effects.

Illiquid wholesale markets are a Illiquid wholesale markets are a significant obstacle for new entrants. significant obstacle for new entrants.

Inadequate unbundling between network Inadequate unbundling between network and supply activities undermines new and supply activities undermines new entry.entry.

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ElectricityElectricity Issue 3: Issue 3: Insufficient market Insufficient market

integrationintegration Interconnectors are key for market integration Interconnectors are key for market integration Long term capacity reservations (grand Long term capacity reservations (grand

fathering) and inadequate capacity allocation fathering) and inadequate capacity allocation rules are barriers to efficient market rules are barriers to efficient market integration (However, recent ECJ ruling)integration (However, recent ECJ ruling)

Incentives to increase capacity. Unless more Incentives to increase capacity. Unless more efficient use of revenues is available, efficient use of revenues is available, congestion fees should be ringfenced with the congestion fees should be ringfenced with the view to using the revenues for reinforcing the view to using the revenues for reinforcing the existing interconnectors. existing interconnectors.

Reduction of administrative burdens to build Reduction of administrative burdens to build new interconnectors is important. new interconnectors is important.

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ElectricityElectricity Issue 4: TransparencyIssue 4: Transparency

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

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

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Electricity Electricity Issue 5: PricesIssue 5: Prices

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

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

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GasGasIssue 1: Market concentrationIssue 1: Market concentration

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

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

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

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

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GasGas Issue 2:Vertical foreclosureIssue 2:Vertical foreclosure

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

Despite the unbundling requirements of the EU Despite the unbundling requirements of the EU gas directive, new entrants believe that network gas directive, new entrants believe that network operators continue practices favouring the operators continue practices favouring the related supply company (IT, commercial info)related supply company (IT, commercial info)

Long term contracts between importers and Long term contracts between importers and customers lead to foreclosure in certain customers lead to foreclosure in certain geographic markets (B, D). geographic markets (B, D).

Other barriers to entry dominate in other Other barriers to entry dominate in other markets (such as storage). markets (such as storage).

Persistent allegations of abusive behaviour that Persistent allegations of abusive behaviour that inhibits switching opportunities.inhibits switching opportunities.

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GasGasIssue 3: insufficient market Issue 3: insufficient market

integrationintegration Clauses in import contracts dating from pre-Clauses in import contracts dating from pre-

liberalisation times have contributed to market liberalisation times have contributed to market segmentation (UIOLI).segmentation (UIOLI).

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

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

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GasGasIssue 4: Lack of transparencyIssue 4: Lack of transparency

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

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GasGasIssue 5: PricesIssue 5: Prices

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

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ConclusionConclusion

Has the market liberalisation Has the market liberalisation delivered?delivered?

We can certainly do better!We can certainly do better!

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What’s nextWhat’s next

DG Competition/sector inquiry:DG Competition/sector inquiry: Public presentation of preliminary report: Public presentation of preliminary report:

16 February 2006, followed by public 16 February 2006, followed by public consultationconsultation

Final report: second half 2006Final report: second half 2006 Expect anti-trust enforcement to start in Expect anti-trust enforcement to start in

parallelparallel DG Transport and Energy DG Transport and Energy

Will investigate effectiveness of legislative Will investigate effectiveness of legislative and regulatory measuresand regulatory measures

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More informationMore information

DG Competition website:DG Competition website:

www.europa.eu.int/comm/competition/www.europa.eu.int/comm/competition/antitrust/others/sector_inquiries/energantitrust/others/sector_inquiries/energy/y/

DG Transport and Energy website:DG Transport and Energy website:

www.www.europa.eu.int/comm/energy/electriciteuropa.eu.int/comm/energy/electricity/report_2005/index_en.htmy/report_2005/index_en.htm//

Questions/comments:Questions/comments:[email protected]@cec.eu.int

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Thank you for your Thank you for your attentionattention

Has the market liberalisation delivered?

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