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MEMO/05/203

Brussels, 13th June 2005

Energy sector competition inquiry – frequently asked questions

(see also IP/05/716)

What is a sector inquiry? Why not just open a case if there is a competition problem?

The Commission uses sector inquiries when it wants to improve its knowledge about a particular sector and in view of better identifying obstacles to competition. Essentially, the Commission opens a sector inquiry if it has concerns that competition may not be working as it should be, but the reason for that is not clear.

Sector inquiries are first of all an information gathering exercise that provides the Commission with in-depth knowledge about markets and is therefore ‘upstream’ of proceedings in specific cases.

Why has the energy sector been selected for such an inquiry?

The energy sector has recently been characterised by significant price increases. Moreover, the Commission has received information from the market indicating that often customers do not receive genuinely competitive offers – both with regard to price and other commercial conditions – from the different suppliers in the market. These signs, combined with the small number of new entrants as well as with the limited market integration and high market concentration point to the possibility that competition may be restricted or distorted at the EU level. These indications require in-depth investigation considering the importance of the energy sector for the European economy - gas and electricity provide crucial inputs for European industry. For EU industries to compete on increasingly globalised markets, they must benefit from competitive energy prices or risk becoming uncompetitive.

What are the steps of the sector inquiry and how long is it expected to take?

The energy sector inquiry (more specifically, one inquiry into the gas sector, and one into the electricity industry) will start with requests for information in the form of questionnaires. The responses of the participants will be evaluated and the main results of the inquiry will be published in 2006. To the extent that the Commission finds clear indications of competition law breaches, individual cases against behaviour of certain undertakings on the market may be initiated during or after the inquiry.

Which companies in the industry will be required to provide information?

The inquiry includes questions to a large number of participants in the energy industry, notably gas producers, electricity generators, gas importers, electricity and gas wholesalers, transmission system operators and customers, gas storage system operators, gas and electricity retailers and industrial customers.

Under what legal instrument is the Commission making this inquiry?

Article 17 of Regulation 1/2003 provides that the Commission can undertake a sector inquiry when the trend of trade, price developments or other circumstances suggest that competition in a given sector might be distorted. The investigative powers available under this inquiry will be those pursuant to Articles 18, 19, 20 and 22 of Regulation 1/2003 that include, among other things, the authority to request by decision information from undertakings, to request information from governments and national competition authorities, to take oral statements from natural or legal persons that consent to do so and to undertake inspections in the framework of the inquiry.

Why are the gas and electricity inquiries separate? What issues does each of the inquiries cover?

The focus of the two inquiries differs somewhat because the sectors are at different stages of development (electricity wholesale markets are more developed) and they have a different supply side structure: gas is mostly imported whereas electricity can be generated anywhere in the EU. However, there are links between these sectors, in particular the increasingly important role of gas as fuel for electricity generation. The gas inquiry will address all of the key issues regarding the functioning of the gas market including access to large-volume gas supply, access to flexibility resources (like storage), access to networks and access to customer markets. In general, the focus is on supply markets and issues that have pan-European dimensions. The most important matters now include the improvement of liquidity in the gas wholesale markets as well as transparency.

The electricity inquiry will focus on price formation in the electricity wholesale markets, which also involves looking at electricity generation and supply, barriers to entry (including long-term agreements), inter-connectors and how companies use them, as well as relations between network operators and their affiliates. As with the gas inquiry, the general focus is on supply markets (rather than transport) and issues that have pan-European implications.

What is the geographical scope of the inquiry? Which Member States will be covered?

The decision to open the inquiry covers all 25 Member States. The Commission will require information from market players in most Member States, although smaller and more isolated energy markets will not be investigated specifically. In addition, competition conditions in countries which are important for cross-border supply or transport (energy highways) are more crucial issues in the European perspective.

The Commission is launching this inquiry with an open mind. If it finds that in a particular country, there is not much scope for further inquiries, it will take this into account. Companies active in Member States where the first round of questions suggests a malfunctioning market can, however, expect further rounds of questions. In setting priorities, the Commission will take into account where EU competition policy legal instruments can make the largest impact on stimulating the emergence of more competition on the European market.

Can the inquiry cover non-European companies?

Companies whose activities affect trade in Europe are covered by EU competition law. The Commission can ask these companies for information, although not enforce orders to provide information outside the EEA territory. The Commission can, of course, require information from their trading partners and all companies that are established in Europe. If later on the Commission finds competition restrictions leading to a formal infringement decision, it can also impose fines on companies even if they are located outside the European Union.

Is the Commission working with national regulators in the inquiry?

The Commission is working closely with national competition authorities within the conditions applying to the exchange of information between authorities. Regulation 1/2003 explicitly foresees such a framework for such an exchange between the Commission and national competition authorities. The Commission has consulted both national energy regulators and national competition authorities in preparing the inquiry. For instance, the inquiry questionnaire contains fewer questions on storage since the European Regulators’ Group for Electricity and Gas (ERGEG) is carrying out its own investigation into compliance with the new voluntary rules on storage access. The regulators are doing an effective and important job in improving competition in the energy markets. However, competition law and regulation serve complementary functions. Although the sector inquiry is not focused on regulatory issues, it might be that some information relating to the regulatory framework also emerges from the inquiry. In such a case, the Commission might consider it appropriate, for example, to suggest appropriate regulatory remedies.

Are the Commission’s competition and energy departments working together on the inquiry?

The sector inquiry is undertaken by the Commission’s Competition Directorate General as the service responsible for competition policy. This inquiry is undertaken in parallel with an information-gathering exercise carried out by the Commission’s Transport and Energy Directorate General in preparation for the Commission’s report to the European Parliament and Council under the Electricity and Gas Directives 2003/55/EC (Article 28 and 31 respectively) on the progress in creating the Internal Market for energy. Whereas the sector inquiry focuses on the market functioning and the way companies behave on that market, the report of DG Transport and Energy will focus on the regulatory issues. The two projects therefore complement each other. In order to optimise existing and potential synergies, the two services are working closely together.

Is it possible that the findings of the inquiry will lead to more legislation affecting the energy industry?

The purpose of the inquiry is to give effect to the EC Treaty’s rules on restrictive business practices and abuse of monopoly power. If respondents highlight regulatory problems, such indications might in principle be addressed directly by using the competition powers entrusted to the Commission under Article 86 of the EC Treaty. The Commission’s findings might also lead to reflections about further legislation. However, the purpose is not a systematic investigation of the functioning of the regulatory framework. The Commission is separately gathering information from national energy regulators on this aspect and preparing a report to the Parliament and the Council on the implementation of the EU Directives on liberalisation of electricity and gas markets.

Why does this inquiry take place now before we can see the full effect of the most recent EU legislation?

The market opened for large customers in 2000 in the gas sector and in 1999 in the electricity sector. A large number of Member States have also opened up their markets more rapidly than the requirements of the most recent EU legislation on energy liberalisation. After 5-6 years of implementation, it is time to take stock of the developments in competition, notably for those customers who have now been eligible for many years. Market developments, such as the recent rise in energy prices, emphasise the importance of improving the situation for energy customers in markets already opened to competition.

Do you think unbundling is working?

In a number of Member States, Transport System Operator (TSO) unbundling as required by the Directives has not yet been implemented. Moreover, for distribution companies the deadline is 2007. So there is certainly still some basic implementation to be accomplished. The Commission will ensure that this is being done in a timely fashion and initiate infringement procedures where appropriate. Nevertheless, the Commission continues to hear complaints about discriminatory treatment by supposedly unbundled companies, and these will be looked at in the inquiry. The outcome of the sector inquiry on the unbundling issue cannot be determined in advance.

Do the inquiries examine any state aid issues?

The sector inquiry first and foremost seeks to establish whether competition works, and if required, to apply the EU’s competition rules to improve the competitive situation. The information will, however, also be analysed with a view to any possible implications on EU state aid policy in the sector. This is to better orient the Commission’s state aid policy. It is not an objective of the inquiry to gather information to start individual state aid cases.

Does the inquiry cover renewable energy?

The sector inquiry covers electricity from renewable energy sources as this electricity is, like any other form of electricity generation, part of the electricity supply. The current existence of a large variety of support schemes for renewable energy may also have implications for the functioning of the electricity market. Furthermore, wind generated electricity is also increasingly important for an understanding of the transmission capacity that is made available to the market.


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