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European Commissioner for Competition Policy
Ladies and Gentlemen,
The European Commission has today adopted the Final Report of its competition inquiry into the gas and electricity markets.
The report confirms that energy markets are not functioning properly. Its disappointing conclusion is that more than a decade after having launched the drive for liberalisation, we are still far from having a single, competitive and well-functioning European energy market.
As a result Europe's consumers, businesses and the economy as a whole are still not benefiting from the full advantages that should flow from the opening up of European energy markets in terms of lower prices and better choice of services.
Two waves of European liberalisation Directives have - to some extent - tackled the inefficient monopolised energy markets of the past. However, the historic incumbents remain dominant on their traditional markets throughout the supply chain.
To enter a market, and provide real competition, new players need access to energy supplies, to the network and to customers. However, three major structural problems, and a number of other barriers, remain.
Firstly, many energy markets are too highly concentrated. The sector inquiry report shows that incumbents have very high market shares of in their respective national gas markets. The level of concentration has also remained very high in many electricity markets, but there are some fairly competitive markets.
In a nutshell it seems fair to conclude that many incumbents have retained firm control of the liberalised markets. Markets themselves remain national in scope, with little new entry. All this gives too much leeway to incumbents to exercise market power, and so impose high prices. To protect their market positions and profits, incumbents engage in various practices that make it harder for new entrants to compete.
Secondly, many energy markets are characterised by a high degree of vertical integration, in other words insufficient unbundling of network and supply activities. When incumbents control the network, they also control the supply market. It is therefore no surprise that incumbents view their networks as strategic assets that allow them to exclude competition through discrimination. Moreover, where network and supply companies are integrated, there are too few incentives to invest in networks - a major obstacle to new entry and a threat to security of supply. Many of Europe's electricity interconnectors are chronically congested. In other words capacity requests by interested network users exceed the amount of available capacity.
The report shows that Europe needs more interconnection capacity. But at the moment, there is insufficient investment to build additional interconnection capacity. For example, the report shows that a selected group of transmission system operators – so called TSOs – collected significant congestion revenues. These revenues are generated by auctioning off the scarce interconnector capacity. The total amount of revenues collected by these TSOs between 2001 and 2005 was about 1.3 billion euros. However, only 250 million euros of these revenues, i.e. less than 20%, was invested back into increased capacity. This is particularly worrying because it is the vertically integrated companies, i.e. those active in supply and network, that failed to invest in network expansion.
Concerns with respect to vertical integration also exist in a different form. There are insufficient tradeable supplies on energy markets – in other words energy markets are not as liquid as they need to be. Long-term contracts contribute to locking-in the markets - for instance they prevent alternative suppliers from supplying customers on the retail markets.
Thirdly, there is an absence of cross-border integration and cross-border competition. Incumbents largely keep to their traditional markets, and rarely enter other national markets as large scale competitors. The report reveals that the energy prices for commercial users vary significantly from Member State to Member State. These differences are not eroded through import competition. One of the reasons is that incumbents stick to their home markets.
Different market designs between Member States contribute to the gloomy picture rendering it difficult to move energy from one point in Europe to another.
On top of this outdated market structure, there is a lack of transparency, for example with respect to available transport capacity, resulting in disadvantages for everybody except the incumbents. As a result, there is no trust in the pricing mechanisms. When prices do not react to changes in actual supply and demand, security of supply and investment in alternative energy sources is threatened.
The public consultation on the basis of the preliminary report of last February has provided large support for our findings and has allowed us to further develop several aspects of the inquiry. The consultations have also provided wide support – except, of course, among incumbents - for firm and decisive action.
So what action can you expect from the Commission based on this report? Let me start to say that our Final Report is not the end of the story, but more the beginning of a new one.
Firstly, today's findings enable us to focus our future action on the most serious competition concerns. They also make it easier to identify efficient remedies that can resolve the specific competition problems in individual cases. For example, in the case of large energy mergers, the in-depth market knowledge and understanding we have obtained about the functioning of electricity and gas markets is already being used in order to better assess competition concerns. GDF-Suez is a good example of this.
Secondly, a number of separate investigations into possible violations of the competition rules by individual companies were launched in May. These cases relate mainly to suspicions of exclusion of potential competitors from wholesale markets and infrastructure - including cross-border capacity - by incumbents, as well as possible collusion between incumbents in the form of market sharing.
Further investigations were launched in December, primarily concerning the withholding of production capacity on electricity markets with the view to raise prices. The inspections also concerned possible abuses on electricity balancing markets, i.e. the market of last resort to which suppliers turn if the consumption of their customers differs from their original prediction. Typically it is the new entrants that rely most on balancing markets and – as a consequence - they suffer most from inadequate balancing regimes, which are set up by the incumbents.
These two competition actions strike at the heart of the problems of market concentration, vertically integration and cross-border integration.
Obviously, our objective is to complete these and other ongoing investigations as soon as possible, and I hope to be in a position to conclude whether or not the companies under investigation have indeed violated the anti-trust rules or not during the course of next year.
As you know, if companies are found to have violated the anti-trust rules, the Commission cannot only impose fines of up to 10% of the global annual turnover, but also impose – under certain conditions - far-reaching structural remedies.
Finally, there is a third important action that the Commission has decided to undertake. Competition policy alone cannot liberalise markets. The report makes clear how urgent and important it is that the enforcement of competition law goes hand in hand with a strengthening of the regulatory framework.
This Commission wants consumers to fully benefit from functioning energy markets. Today's report shows the need for permanent structural changes to resolve the problem of vertically integrated supply and network companies. Equally important, Europe needs stronger regulators, enhanced coordination and increased transparency. As such, the full weight of the energy sector competition inquiry findings is behind the reinforced regulatory measures needed to achieve the energy Internal Market, which have been presented earlier today by President Barroso and Commissioner Piebalgs.