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Brussels, 15 November 2005

Competition: Commission sector inquiry reveals serious problems in energy markets

Responses from the energy industry and customers confirm that European energy markets are not yet functioning on a competitive basis, according to the preliminary results of the Commission’s sector inquiry into the European gas and electricity markets. Competition Commissioner Neelie Kroes has informed the Commission about these results (see IP/05/1421) and will present them to the EU’s Council of Energy Ministers on 1st December. The Commission will continue its inquiry and will also identify adequate remedies. Such remedies may include action against operators under the EC Treaty’s bans on restrictive business practices and abuse of dominant market positions, a revision of EU merger rules’ provision that large concentrations where all the parties have more than two thirds of their EU turnover within a single Member State are dealt with by that Member State’s authorities and not the Commission, and action under the EC Treaty’s state aid rules against subsidies that distort competition.

The preliminary findings of the sector inquiry confirm and complement the results of the Commission’s report on the implementation of the European energy market, which the Commission adopted today (see MEMO/05/427).

Five areas of market malfunctioning have been identified at this stage by the responses to the sector inquiry. First, gas and electricity markets in many Member States continue to be concentrated, creating scope for incumbent operators to influence prices. Second, many wholesale markets are not liquid either because of long term contracts (gas) or because companies are active both in production and in the retail market limiting the need to use wholesale markets (electricity). There is also an inadequate level of unbundling of network and supply activities. Third, barriers to the cross border supply of gas and electricity prevent the development of integrated EU energy markets. Fourth, a lack of transparency on the markets benefits incumbents and undermines the position of new entrants. Lack of transparency also aggravates the mistrust by industry and consumers in the specific price formation mechanisms on energy wholesale markets.

The key issues identified by responses to the sector inquiry are:

  • Market concentration
  • Gas - most national markets remain highly concentrated. Market entry on wholesale markets is limited by incumbents’ control of gas imports and long term reservations in import pipelines.
  • Electricity - the level of concentration in generation is high in many countries creating scope for incumbent operators to influence prices.
  • Vertical foreclosure
  • Gas - vertical integration and limited sales by incumbents on gas hubs result in low liquidity of the wholesale markets. Long term contracts contribute to the foreclosure effects. New entrants believe that network operators continue to favour affiliates.
  • Electricity - vertical integration between generation and retail markets as well as long term power purchase agreements lead to illiquid wholesale markets. Inadequate unbundling between network and supply activities also undermines entry.
  • Market Integration
  • Gas - restrictive clauses in import contracts contribute to market segmentation. Access to cross-border pipelines and entry points to national gas systems is limited by preferential treatment of pre-liberalisation contracts. There is also some scope for optimising use of these pipelines.
  • Electricity - interconnectors are crucial for market integration. Long term reservations of capacity on interconnectors agreed upon prior to liberalisation and inadequate allocation rules are barriers to market integration. Incentives to increase capacity need to be strengthened. Congestion fees should be used more for reinforcing cross border capacities.
  • Transparency
  • Gas - increased transparency especially about access to networks is vital.
  • Electricity -poor transparency of wholesale markets prevents a level playing field for electricity trading. 84% of suppliers, traders and generators believe that useful, important or indispensable information is lacking.
  • Price formation
  • Gas - prices in most upstream contracts are linked to oil derivatives. There seems to be no trend towards more market-based pricing.
  • Electricity - energy consumers do not believe that prices on wholesale markets result from fair competition. The co-existence of regulated and free market prices is causing distortions.

The sector inquiry was launched on 13 June 2005 (see IP/05/716) following a number of complaints by market participants about high prices and market malfunctioning. The Commission sent 3000 questionnaires to market participants concerned, making this one of the most thorough investigations the Commission has undertaken under its competition powers. As a next step, Commissioner Kroes will present the findings to the Energy Council on 1 December 2005. A public presentation of the preliminary report is planned for February 2006 followed by a 2 months consultation period. The inquiry will be completed in the second half of 2006.
The text of the Commission services working paper summarising the issues identified is available on the Europa website:

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