European Commissioner for Competition Policy
competitive energy markets: building on the findings of the sector inquiry to
shape the right policy solutions
European Energy Institute
Brussels, 19th September
Ladies and Gentlemen,
The wide-ranging energy package presented by the European Commission today is
a great opportunity. It opens the door to truly effective competition in
Europe’s energy markets, to the benefits of consumers – businesses
and households alike.
The serious problems in the energy sector
For ten years the EU has gradually liberalised its energy markets. Yet it is
clear that these markets are still not working as well as it should, to deliver
the results citizens and businesses expect. In 2005 I launched a detailed
inquiry under competition rules, to find out exactly where the source of the
The results were deeply concerning. In summary, we found five main problems:
- First, continuing high levels of concentration so incumbents maintain market
- Second, vertical foreclosure, as the old monopolists continue to own the
- Third, low levels of cross-border trade, due to insufficient interconnector
capacity and to contractual congestion since spare physical capacity is not
- Fourth, lack of transparency about operations in the wholesale energy
sector, which makes it difficult for new entrants to understand how the markets
work in practice and the risks that they take on; and
- Finally, lack of confidence that wholesale energy prices are the result of
Consumers – individuals and businesses
– are paying the price for these barriers to competition. It is high time
these problems were solved – once and for all.
The sector inquiry conclusively demonstrated that the existing regulations
– in particular the rules on legal unbundling - are not adequate to
address these issues. More specifically, the current rules cannot remedy three
major problems due to joint ownership of network and supply businesses. These
- First, the fact that there is discrimination in access to infrastructure. I
can cite the case of a Transmission System Operator that granted its affiliated
supply company substantial rebates that were not available to others. In
another case a Transmission System Operator offered transport capacity to its
affiliated company while refusing firm capacity on an almost identical route to
- Secondly, there is the issue of information leakage. In some cases the top
management of the supply branch have access to strategic business information of
the transport company, either directly or as a result of their presence on the
Board. Or on a more practical level, e-mails are copied to affiliated companies.
In some cases it appears that central functions, such as legal advice, are still
provided by the group holding company to all members of the group, which clearly
reduces the scope for objective treatment of all market participants by the
Transmission System Operator. There are therefore limits to how far Chinese
Wall arrangements can actually achieve their function on the ground.
- Most importantly, there is the fact that under present structures investment
incentives are badly distorted. Transmission System Operators’ investment
decisions are in practice often taken by the group as a whole. For example, the
Italian competition authority fined ENI for stopping the expansion of the
Trans-Tunesian gas pipeline proposed by its network business. The investment
would have introduced more competition in the Italian market, and you can see
who would gain and who would suffer as a result! In addition, integrated
Transmission System Operators have a chilling effect for the investment strategy
of third parties who will think twice about investing if they fear unfair
treatment by the network operator.
As I have said in the past,
these problems completely undermine effective competition. The figures speak for
Look at electricity: in countries where the distribution cables are owned by
the same companies as those that sell electricity, households paid
over 29% more in 2006 than in 1998. The increase was just 6% in
those countries where the companies that own the distribution cables and sell
the electricity are different.
And let me give you another example. In Germany the market is dominated by
vertically-integrated companies, and the retail energy prices for small users
are higher than in countries where energy companies have been unbundled, such as
German electricity wholesale prices were on average 10% cheaper compared to
UK prices in the time period 2004 to 2006. But still, industrial customers paid
on average between 25 and 30 % more for their electricity. For households the
difference is even larger, with German consumers paying 31 % more. Let me be
clear that all these figures are before tax, but they show that the network
charges and distribution margins in Germany must be significantly higher than in
An urgent, decisive and effective response to these issues is needed.
Today’s package provides just that.
Enforcement of Competition Law
There are people out there who argue that the package was not needed, and
that firm enforcement of the competition rules can fill in the gap. I’m
flattered by this, but I have to disagree.
Of course I intend to continue to use the Commission's powers fully to
enforce the EC competition rules in a strict and targeted way in these markets.
We have already carried out three rounds of inspections on energy companies and
have opened formal proceedings in some cases. My colleagues in the national
competition authorities have also been very active in enforcing competition
rules in the energy sector. Our aim is to ensure that there is effective
competition at all levels in the industry and the cases broadly fall into four
- Firstly, in some markets dominant undertakings appear to have concluded a
wide portfolio of contracts with customers that may hinder new entrants and
other competitors from building up a viable customer base. I hope to soon
propose that the Commission adopts a decision making binding commitments we
received from Distrigas concerning the Belgian gas market. And recently I have
opened proceedings against EDF and Electrabel due to similar concerns in the
- Secondly, we are concerned that some dominant undertakings use their control
of the networks to hinder new entrants and other competitors from being able to
make competitive offers. So the Commission has recently opened proceedings
against RWE and ENI.
- Thirdly, we have also seen that in practice established energy companies
hesitate to enter neighbouring energy markets even if they appear well placed to
do so. I am very concerned about the possibility that this could reflect some
sort of market sharing or non-compete agreements between the companies. We have
opened proceedings against EON and GDF to examine such concerns.
- Finally, we are concerned about unfair State subsidies in the energy sector
and so have opened proceedings to investigate further.
So as you can see the Commission is very active in enforcing the competition
rules in these markets. But no matter how strict we are, competition tools
cannot solve all the problems – they can only be used to sanction
anti-competitive behaviour. Competition enforcement is a necessary but not
sufficient means to liberalise the markets. So legislation is a necessary
second leg to our response to the problems in these sectors.
This should in particular provide for effective separation of network from
supply as supported by the Parliament and the Member States. This is essential
if consumers are truly to reap the benefits of competitive energy markets.
Individual Member States have already realised this. 13 Member States have
introduced a form of ownership unbundling in electricity and 7 in gas.
Andris Piebalgs has already summarised the Commission’s proposals more
elegantly than I could, so I won’t repeat his comments. But I do think it
is important to give you a clear picture of just how today’s package will
address the problems identified during the sector inquiry and in our individual
- The first problem we identified is high concentration. The sector inquiry
found that concentration levels in ownership unbundled markets are lower. For
example, the average market share of the largest electricity generator in 2005
in Member States with legal unbundling was 73% compared to only 47% in Member
States with ownership unbundling. Furthermore, in Spain, Italy and Portugal the
market share of the largest generator dropped by more than 6 percentage points
following ownership unbundling.
- The second problem we found is vertical foreclosure and this is, of course,
directly addressed by our proposals on unbundling. The unbundling proposals
will also address the three areas of distortion that we found during our
investigations and in particular the will rebalance the conditions in which
investment decisions are taken. Ownership unbundling is the cleanest and most
efficient way to achieve effective separation. For those Member States that do
not choose ownership unbundling, the energy companies must entrust the operation
and investments into the networks to a genuine and verifiable Independent System
Operator. This is a more complex way to achieve the same aim, and the Member
States who pursue it will need to put in place more regulation. I can assure
you that we will watch closely over its strict implementation.
- The third problem we came across is the lack of cross-border trade. Here a
number of proposals will help. The unbundling proposals will increase
investments in the network and in related assets such as LNG plants. As seen in
the inquiry, the share of reinvested congestion revenue was about twice as high
for unbundled Transmission System Operators than for integrated ones. And it is
remarkable that all the LNG terminals that are being built by new entrants are
in the few Member States with unbundled gas networks. In addition the creation
of the regulatory agency and the formalisation of ETSO will help to breakdown
the regulatory and operational barriers between national markets.
- The lack of transparency we found will be directly addressed by the
proposals. This is an important point as new competitors will not enter the
markets unless they have objective information on the overall supply to the
market and the demand by consumers. The transparency measures are also aimed at
preventing artificial price hikes because gas or electricity is hidden from the
market, or because artificial demand is created.
Only under such
circumstances will newcomers and investors be able to quantify the potential
risks and profits, and only then will they want to invest in the European energy
- Finally, the fundamental lack of confidence in the pricing mechanism will be
addressed by the transparency rules and the combination of all the elements in
the package which should come together to develop effective competition and
provide cost-reflective prices for end-consumers.
So there you
have our five solutions to the five very concrete and pressing problems
identified in the sector inquiry. And today’s package is one which I
think both Andris Piebalgs and I are right to be proud of.
Ladies and Gentlemen, effective competition in the energy markets is
essential not only in its own right, but also to achieve our goals of security
of supply, cost-reflective prices and environmental sustainability. This is what
European consumers want, and what they deserve. But delivering this requires
comprehensive structural change to the sector, as we have seen that even the
most diligent competition enforcement cannot solve all the problems in these
markets. I am convinced that today’s comprehensive proposals will deliver
the changes we so badly need.
Effective unbundling will solve many but not all problems. Strong and
consistent regulation will also be required. Moreover, cross-border co-operation
between regulators and Transmission System Operators needs to be improved. That
is why the Commission has put a wide-ranging package on the table. Now we need
to work with Parliament and Council to see this package adopted as quickly as
On my side, I will continue to play my part through effective and targeted
enforcement of EC competition rules covering antitrust, State aid and merger
Europe – and in particular its 500 million citizens - can not afford to
wait any longer to get the best deal from its energy markets.