Towards the Energy Union through antitrust law enforcement

(1)

Towards the Energy Union through antitrust law

enforcement

Master thesis

Name:

Zuzana Šprtová

Student number:

11098775

Master programme:

International and European Union Law: European

Competition Law and Regulation

Supervisor:

Dr T.A.J.A. Vandamme

(2)

1

Abstract

The EU planned to establish the internal energy market by 2014 which however, was not fulfilled. The desire to liberalise the European energy markets resulted in the adoption of a concept of the Energy Union. Among so-called dimensions that together create this project are also competitiveness on the market and full market integration. The Energy Union is a broad concept which comprises different policy areas. Therefore, it requires high level of both, national and EU-wide cooperation. However, in a dynamic sector such as energy one, it is difficult to estimate when, and if ever, will be this challenging goal achieved.

On the way to creation of the Energy Union, anti-competitive practices of energy incumbents were identified as one of the main obstacles to liberalisation. Antitrust law was effectively used in two ways to cope with barriers that prevented true market integration. First, antitrust law enforcement was applied in order to ensure fair and competitive conditions on the market, thus to fulfil its traditional role. Second, it was intentionally used to enhance market integration by means of structural remedies adopted within a commitment procedure which had strong influence on the structure of the energy companies and the market design as such. This work discusses how the antitrust law enforcement has contributed to the integration of the energy sector and, consequently, to the Energy Union by analysing antitrust electricity and gas decisions issued by the Commission and the European Court of Justice. The discussed decisions concern mainly cases adopted within so-called commitment procedure which enabled the Commission to intervene into the integration process of the energy sector. The insight into the most recent antitrust cases provides analysis about the current situation on the energy market and the Commission´s approach.

(5)

4

Acknowledgement

I would like to thank my supervisor Dr T.A.J.A. Vandamme of the Amsterdam Law School at the University of Amsterdam for his valuable advice, remarks and comments on the text and friendly and encouraging approach throughout writing of this thesis.

Table of abbreviations

ECJ – European Court of Justice EU – European Union

ISO – Independent system operator ITO – Independent transmission operator LNG – Liquefied natural gas

NCA – National competition authority SGEI – Services of general economic interest

TFEU – Treaty on Functioning of the European Union TSO – Transmission system operator

(6)

5

1. Introduction

The European energy sector went through a significant transformation in the last three decades. The aim was to abandon market segmentation with dominant incumbents that eliminate most cross-border competition and instead achieve the single European energy market which is competitive and which ensures a free flow of energy. The adoption of an EU-wide regulatory framework which would give the Member States incentives to abandon the monopolistic model of national energy markets, was a necessary step. In this regard, three energy liberalisation legislative packages were adopted since 1996 that focused on elimination of the market barriers that prevent true integration of national energy markets. Anti-competitive practices present on the market were among the reasons why the liberalisation process lagged behind the initial plans. Within this process of market integration competition law instruments were applied besides the sector specific regulation not only in order to maintain competitive conditions on the market but also in order to make contribution to the integration itself.

To achieve the single European energy market, the Commission has intentionally exercised its leverage to enforce antitrust law by issuing commitment decisions. This policy resulted in structural change of first, the energy undertakings and second, the market itself. On one hand, the Commission has played its traditional role of a watchdog over fair and competitive conditions on the energy market while on the other hand it has actively assisted in the process of implementation of sector legislation and integration by approving key structural remedies which the energy undertakings committed to put into practice.

This work analyses the process of formation of the Energy Union represented by both, true integration of European energy markets and their competitiveness, through antitrust law enforcement. The study examines antitrust and cartel decisions issued by the Commission as a result of its decision-making powers under Regulation 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty1, as these remarkably co-shaped the energy market, and case law decided by the ECJ. The main research question therefore is: How the Commission contributed to the development of the Energy Union by means of enforcement actions and antitrust policy? This question is prompted by general consideration on the dividing line between regulatory activity and antitrust policy. Can

1_{Council Regulation (EC) 1/2003 of 16 December 2002 on the implementation of the rules on competition laid}

(7)

6

regulation achieve a true liberalisation in a specific highly compartmentalised sector or is it dependent on antitrust rulings of the Commission as a necessary complementary factor? And how do these two types of activities interrelate? The energy market and the goals of transforming it into a true Energy Union seems to be the ideal sector to investigate questions like these.

In order to tackle this research question chapter two will provide an analysis of the so-called structural issues related to the energy market and current regulatory framework with a brief overview of its past development. Chapter three then analyses the antitrust decisions on electricity and gas. The decisions were mainly adopted within a commitment procedure with the remedies being proposed by the energy companies responsible for market segmentation and poor competitive conditions. Thus, the focus will be on the relation of the remedies proposed by undertakings within the commitment procedure and the contribution to the market integration and the formation of the Energy Union and the correlation between the antitrust decisions and the positive law which was created by sectoral regulation at EU level. The study concerns electricity and natural gas sector, as the special feature common for these two sources is that they require sufficient infrastructure (grids and pipelines) to ensure energy supply. At the same time, transmission systems were traditionally owned and operated by integrated incumbents due to the fact that building parallel networks that would introduce sufficient competition into these markets would be inefficient, if not even impossible. The final chapter deals with the notion of the Energy Union and the correlation between previously discussed decisions and market integration process.

The study presumes that the reader has a general knowledge about European competition law, mainly about the content of Articles 101, 102 and 106 Treaty of Functioning of the European Union (TFEU). The method used in the work is descriptive and explanatory while the comments and the conclusions provide general recommendations.

Lastly, integration of the energy market is clearly affected not only by antitrust law enforcement but also by merger and state aid control. Similarly, competition law actions pursued by the national competition authorities (NCAs) at national level contribute to the formation of the Energy Union. However, the decisions issued by the NCAs might be more focused on the national policies than integration itself. Although merger and state aid control and antitrust energy decisions issued by the NCAs affect the European energy sector, they

(8)

7

were not included into this analysis due to space and time limitations. Finally, the research was concluded in June 2016.

(9)

8

2. Structural elements of the energy market and the regulatory framework

2.1. Energy as a commodity and public service obligation

A free energy flow between the Member States in liberalised, competitive, and fully integrated European energy market requires energy to be perceived as a commodity, and as such a subject of competition rules.2 As regards electricity and gas tradability on stock exchanges, the doubts mainly touched upon their effective transportation ability, the sufficient number of participants covering supply and demand, possibilities to secure their homogeneity and standardised quality, and efficient storability.3 These barriers to tradability of both energy sources became obsolete with the development of new technologies.4

The market liberalisation process has been influenced also by the fact, that both energy sources are characterised by specific features. For instance, there are different ways of electricity production with the EU being relatively self-sufficient in its generation, while its storability remains problematic. Gas, on the other hand, can be liquefied, stored and transported, but the Union is highly dependent on its importation from third countries.

What makes European energy markets special is that, despite the variability of national markets, the EU customers are used to continuous and high standard of energy supply for affordable, often regulated prices. Therefore, energy services have been recognised as being of general economic interest (SGEI) within the meaning of Article 106 (2) TFEU which provides an exception for the application of the EU competition rules.5 Moreover, Protocol (no 26) of the Treaty of Lisbon on services of general interest laid down that Member States have a wide discretionary power when identifying SGEI and deciding which economic activity is of particular importance for the public.6

2_{A. Ispolinov, T. Dvenadtcatova, "The creation of a common EU energy market: a quiet revolution with}

far-reaching consequences", (2013), no. 2(16), Baltic Region, p 80

3_{T. W. Berrie, M. Hoyle, "Treating energy as a commodity" (1985), 13(6), Energy Policy, p 507} 4_{E.g. microelectronic devices enabling information exchange on supply and demand at a real time}

5_{In the Almelo case the Court held that an exclusive purchasing clause imposed by regional electricity distributor}

which prohibited a local distributor from importing electricity for public supply and affected trade between Member States, falls under the SGEI as far as the restriction of competition is necessary for the undertaking to perform its tasks of general interest. Case C-393/92 Municipality of Almelo and Others v Energiebedrijf

IJsselmij NV [1994] ECR I-1477; Electricity Directive 2009/72/EC and Gas Directive 2009/72/EC also identified

the public service obligation imposed under Article 106 (2) TFEU in operation of SGEI in energy sector.

6_{N. Ruccia, "The legal framework of services of general economic interest in the European Union” (2011),}

(10)

9

2.2. Structural issues of the energy market

During the process of integration, the energy sector had to cope with number of barriers of structural and technical nature. Below will be introduced some of them to the extent which will facilitate the understanding of antitrust decisions discussed in chapter three, without mentioning too many technical details.

2.2.1. Vertical integration and unbundling

Energy companies were often integrated vertically at the level of production, transmission, distribution, and supply. This was seen as a main reason for market concentration, foreclosure for new entrants, and discrimination in access to transmission system or gas storage terminals. Integrated monopolists who exercised control over the networks were pursuing their own economic interests or interests of their subsidiaries. Their business strategies influenced by the desire to preserve low level of competition resulted in underinvestment in the whole sector. Incumbents simply had no incentives to invest into new capacities if these were to bring opportunities for their potential competitors and threaten their well going businesses.

Inasmuch as it would be irrational to build parallel transmission networks, it was decided to set aside transmission from generation and supply and abolish the integrated model by means of unbundling. The ownership unbundling concept is based on a principle that the same entity should be prevented from exercising control over the network and energy generation and supply activities at the same time so the conflicts of interest can be eliminated.

However, restructuring of the energy sector had to face a stubborn resentment of some Member States such as France, Germany or Italy which were trying to preserve the position of their national integrated champions. The unbundling thus took place gradually in three levels as follows:

1. Separation of financial accounts, with individual bookkeeping for generation, transmission and supply services, so business operations were easily identified, while the company remained integrated. Also, an independent management of the transmission system operator (TSO) disconnected from activities unrelated to energy transmission was required at the same time.7

7_{Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common}

rules for the internal market in electricity [1996] OJ L27/20, [hereinafter Electricity Directive 96/92/EC], art 14; Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas [1998] OJ L204/1, [hereinafter Gas Directive 98/30/EC], art 13

(11)

10

2. Legal unbundling required the network services to be provided by a separate legal entity with an independent management, while the previously integrated structures remained connected in a form of holding. Alike, independent management of TSO was required and the parent company was prevented to intervene in day-to-day activities of the subsidiary.8 3. Effective full ownership unbundling was a clear-cut solution to separation of generation

and supply activities from network where either the first or the latter were sold to become independent entities. The transmission system owner became TSO, a separate legal entity independent from production and supply, while both were prohibited to exercise control over each other. Cross-operation of management were also prohibited, so as the entitlement to appoint management, and exchange of commercially sensitive information.9 The third package directives provided the Member States with two alternatives to ownership unbundling, however, they were only available for the companies integrated before 3 September 2009.10 The option included designation of an independent system operator (ISO) or independent transmission operator (ITO),

ISO is an entity fully responsible for the transmission system while the network is still owned by the integrated undertaking. In other words, ISO operates the grid while the former monopolist remains the grid owner. Interesting, and maybe impractical is, that ISO makes decisions about the investments into the network, while the network owner is obliged to finance them.11_{ISO remains independent as regards the legal form,}

organisation and decision making.12

Finally, ITO as the weakest form of unbundling, allows the transmission system to remain a part of integrated company in a form of holding. However, ITO is obliged to submit yearly long-term network development plan to the regulatory authority which is consulted with all the actual or potential network users, while the regulatory authority controls the execution of these investments and may oblige ITO to complete them.13

8_{Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common}

rules for the internal market in electricity [2003] OJ L176/37 [hereinafter Electricity Directive 2003/54/EC], art 11; Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas [2003] OJ L176/57 [hereinafter Gas Directive 2003/55/EC], art 13

9_{Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common}

rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L211/55 [hereinafter Electricity Directive 2009/72], recital 11, 14, 15, 16, 18, art 9

10_{Ibid. art 13 (1)} 11_{Ibid. art 13 (5)} 12_{Ibid. art 13, 14} 13_{Ibid. art 17 - 23}

(12)

11

Nevertheless, it was argued that the regulatory burden and additional requirements imposed on ITO and ISO caused that the ownership unbundling was the only feasible choice left for most of the Member States at the end.14

2.2.2. Infrastructure and interconnection15

A cross-border flow of energy and market integration would be simply impossible without sufficient infrastructure. The expansion of networks was generally undermined due to incumbents´ lack of interest to invest into transmission capacity, thus intensification of existing electricity networks, interconnections, gas transit pipelines, and completion of missing links between certain regions became one of the priorities. Currently, the EU pursues a goal to reach 10 % interconnection of electricity markets by 2020. The main obstacle stems from the costs-demanding character of energy infrastructure. While investment incentives are mostly stimulated by the EU financial support tools16, the instruments of competition law enforcement can also positively affect the undertakings` investment decisions to certain extent, as will be suggested later.

 Interconnection, renewable energy, grid stability, and loop flows

Well interconnected energy markets help to stabilise the fluctuations in networks caused by renewable energy, due to the fact that the amount of energy produced by solar or wind installations is often unpredictable and can have damaging effects on power plants and grids. Moreover, it helps to resolve the problem of loop flows mainly invoked by renewables which are unplanned electricity flows from one country with insufficient transmission capacity to another due to the fact that electricity flows through the path of the least resistance.17

14_{R. Boscheck, "The EU’s Third Internal Energy Market Legislative Package: Victory of Politics over Economic}

Rationality?" (2009), World Competition 32, no 4, p 604

15_{An interconnector is an equipment that enables connection of networks and cross-border flow of energy.} 16_{The estimated sum to reach the 10% target equals to EUR 35 billion. Interconnections projects are projects of}

common interest and can be supported through the European grants project, combined with other financial sources, such as the European Structural and Investment Funds, the European Regional Development Fund, the European Fund for Strategic Investment, partnership with the European Investment Bank, together with private investments, commercial banks and other market based instruments such as the European Long-Term Investment Funds. Communication from the Commission to the European Parliament and the Council “Achieving the 10% electricity interconnection target. Making Europe’s electricity grid fit for 2020”, COM(2015) 82 final, 25.2.2015 Brussels, [hereinafter Commission Communication on electricity interconnection level], p 10-12

17_{E. Chambers, “Unplanned flows drive rise in Czech grid’s transit load – CEPS” (2016) URL:}

http://www.icis.com/resources/news/2016/02/05/9967464/unplanned-flows-drive-rise-in-czech-grid-s-transit-load-ceps/# (accessed 7 May 2016)

(13)

12

Reinforcement of cross-border transmission capacity is becoming more important with increasing share of energy produced from renewables as a result of Union`s environmental goals.

2.2.3. Storage capacity

Energy storage facilities allow to balance demand and supply of energy at particular time (as regards renewable energy production), decrease dependence on gas import, and secure energy supply. Within the frame of the Energy Union, LNGterminals are of particular importance as they contribute to the diversification of gas supply sources.18 It is a fact that the EU remains dependent on gas importation from third countries which makes it relatively vulnerable especially taking into account gas supply crisis in the recent years. LNG might be a solution to certain extent. The drawback of LNG might be however a higher price compared to gas transported by conventional ways, taking into account that the costs for building LNG terminals are usually passed on to consumers.

As can be seen, in order to integrate European energy market the EU has to cope with several issues of rather technical nature. They are being resolved by means of the EU liberalisation legislation which implemented tools such as ownership unbundling of TSOs or its alternatives (ISO, ITO) which is supported by the application of competition law and its enforcement as will be shown below.

2.3. The regulatory framework

2.3.1. From monopolies to liberalisation

The intention to integrate the European energy sector dates back to the establishment of the European Communities in the 1950s.19 On a long term basis, the Union was supporting development of energy infrastructure and interconnection of national networks which was laid down in Articles 170 – 172 TFEU establishing the trans-European networks (before Article 154 the EEC Treaty). Later, separate Article 194 TFEU was added by the Lisbon Treaty in

18_{Once liquefied, gas takes 600 times less volume and can be transported by ships or tankers, so no pipelines are}

needed.

19_{D. Chalmers, G. Davies, G. Monti, “European Union law: cases and materials” (third edition, Cambridge}

(14)

13

order to define shared competence of the EU within the energy sector, according to which the energy policy shall ensure well-operating energy market, security of supply, promote the environmental-friendly use of energy and renewable sources, and support the interconnection. A conventional European energy market was separated, monopolised, with a strong state regulatory powers and vertically integrated incumbents, due to a general conviction that it is the only way how a decent, safe, and stable supply of energy can be secured while participation of the private business sector and competition were in principle denied.

Since the late 1980s, the idea of decentralization and liberalisation of the energy market has gradually spread across Europe which was strengthened by the successful outcome of privatization and liberalisation of the telecommunication and the energy industry in the US and the UK in 1970s and 1980s, respectively.

Effective integration required to abolish number of obstacles, such as the separation, monopolisation and foreclosure of national markets, vertical integration, insufficient infrastructure, inconsistency in standards, technical requirements, and authorization procedures etc. From the regulatory point of view, the liberalization of the European energy market has taken place gradually and has been reflected in adoption of three liberalization energy packages so far.

2.3.2. The way towards the current energy liberalisation framework: First and Second package

First Electricity Directive 96/92/EC and Gas Directive 98/30/EC implemented in 1999 and 2000, respectively, introduced an obligation to separate bookkeeping and split of the management.20 This contributed only to a partial opening of the markets, whereas the third party access to the transmission and distribution system which was based on negotiation of commercial supply contracts or regulated on basis of public tariffs, applied only to limited customers.21 As regards implementation of the directives, the wide discretion of Member States created inconsistency in national laws and, ironically, caused even greater separation of the national markets.22

20_{Electricity Directive 96/92/EC, supra note 6; Gas Directive 98/30/EC supra note 6}

21_{So-called eligible customers were all final customers falling under conditions defined by the directives and}

other specified by the Member States.

22_{L. Kovačovská, "Liberalisation of the Internal Market in Electricity and Natural Gas as a Tool for Enhancing}

(15)

14

In 2003, a second package was adopted, comprising of Electricity Directive 2003/54/EC and Gas Directive 2003/55/EC and two regulations, inasmuch as the first package was not sufficient to achieve the liberalisation goals.23 This legislation opened the access to networks for all business non-household customers from 1 July 2004 and for all other customers from 1 July 2007.24 Next, it established legal and organisational unbundling of transmission and distribution systems, however, without the obligation to separate the ownership assets.25

2.3.3. Third package

The above-mentioned legislation, however, was not sufficient to ensure the desired level of integration. The competitiveness of the energy market was low while barriers to cross-border trade still persisted. This made the Commission to commence a comprehensive inquiry into the energy sector in 2005, in order to qualify the reasons that prevented full market integration, and propose effective solutions thereof.

The investigation confirmed ultimately that behind slow integration of traditionally monopolised and foreclosed markets were more or less typical barriers to competition. First, it was observed undesired level of market concentration with dominant incumbents which enabled to prevent new entries especially on gas markets and to raise prices by means of withdrawal of capacity on electricity markets. Second, the vertical foreclosure allowed to post entry barriers and to discriminate third parties to access the networks, whereas integrated companies favoured their own subsidiaries. Third, insufficient or unavailable cross-border capacity, limited capacity of gas pipelines, low electricity interconnector capacity, non-transparent information about network availability, and non-non-transparent price formation with regulated tariffs which were set far below market prices discouraged new companies from entering the markets. Fourth, long-term contracts with tacit renewal clauses and extremely long termination periods hampered competition between industrial customers and supply incumbents on the downstream market (at the retail level). Next, small size of balancing zones

23_{Gas Directive 2003/55/EC, supra note 5; Electricity Directive 2003/54/EC supra note 5; Regulation (EC) No}

1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity [2003] OJ L176/1; Regulation (EC) No 1775/2005 of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission network [2005] OJ L289/1

24_{Electricity Directive 2003/54/EC supra note 5, art 21} 25_{Ibid art 10; Gas Directive 2003/55/EC, supra note 5, art 9}

(16)

15

hindered new entries, increased costs and protected market power of incumbents.26_Finally,

whereas overall capacity of LNG increased due to large investments which strengthened downstream competition, it was observed that further improvements and control of abusive behaviour is still needed.27

The third legislation package was adopted on grounds of these findings with a view to provide regulatory solutions in order to reach ultimate progress in integration process. The package comprised of two directives regulating the electricity and gas market, namely Electricity Directive 2009/72/EC and Gas Directive 2009/73/EC and three regulations: Regulation (EC) 714/2009 and Regulation (EC) 715/2009 dealing with the conditions for access to gas and electricity markets and Regulation (EC) 713/2009 establishing the Agency for the Cooperation of Energy Regulators.28 The Member States were obliged to implement the legislation by March 2011.

At the core of both, the Electricity Directive 2009/72/EC and the Gas Directive 2009/73/EC are mandatory ownership unbundling of transmission system operators and the ISO and ITO alternatives. It was suggested that among the top elements which were responsible for ownership unbundling becoming a priority was strengthened influence of the energy-consuming industry (as keen supporter of energy market liberalisation) over the Commission as opposed to the period when previous liberalisation packages were adopted.29_{In order to}

support investments decisions, gas sector was exempted from the obligation of ownership unbundling, access to networks and storage facilities to certain extent, providing that gas

26_{Balancing ensures that demand is equal to supply in a real time which secures the supply and reduces the need}

for back-up generation. URL:

https://www.entsoe.eu/about-entso-e/market/balancing-and-ancillary-services-markets/Pages/default.aspx

27_{Commission Communication - Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European}

gas and electricity sectors (Final Report), SEC(2006) 1724, COM(2006) 851 final [2006] [hereinafter Commission Communication Sector Inquiry]

28_{Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common}

rules for the internal market in electricity and repealing Directive 2003/54/EC [2009] OJ L211/55 [hereinafter Electricity Directive 2009/72/EC]; Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC [2009] OJ L211/94 [hereinafter Gas Directive 2009/73/EC]; Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators [2009] OJ L211/1; Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 [2009] OJ L211/15; Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 [2009] OJ L211/36

29_{P. O. Eikeland, "The Third Internal Energy Market Package: New Power Relations among Member States, EU}

(17)

16

companies decide to invest into infrastructure. The legislation also put focus on independence of national regulatory authorities.

In order to tackle concerns that non-EU entities, who are not subject to the EU unbundling rules, would be able to purchase networks and accordingly acquire excessive influence over European energy grids, the third package directives introduced so-called Gazprom Clause.30 This provision requires that TSO can only by purchased by an undertaking which is liable to identical unbundling requirements under its domestic law and the transaction shall be approved by the Commission eventually.

Regulation (EC) No 714/2009 and Regulation (EC) No 715/2009 on conditions for access to networks laid down the use-it-or-lose-it principle which required that reserved capacity must be used, otherwise it will be placed back to the market, in order to prevent ineffective capacity reservations. Next, they established cooperation of all European transmission system operators through the European Network of Transmission System Operators (the ENTSO for Electricity and the ENTSO for Gas).

The Commission was entrusted with the task to monitor regularly the progress achieved by means of the third package. In 2015, it was reported that despite certain achievements in the integration process “current market design does not lead to sufficient investments, market

concentration and weak competition remain an issue and the European energy landscape is still too fragmented.”31_{However, it can be concluded that there is currently neither an}

intention to launch another complex inquiry into the energy sector nor a plan to propose another liberalisation package.

2.3.4. Other legal instruments shaping the European energy market

Legal instruments that regulate the European energy market and contribute to integration besides the third package legislation include the Treaty provisions concerning free movement of goods (Article 34 – 37 TFEU), Article 114 TFEU as a legal basis for both Electricity Directive 2009/72/EC and Gas Directives 2009/73/EC and for the internal market harmonisation, as well as already mentioned Article 194 TFEU which specifies shared

30_{Electricity Directive 2009/72/EC supra note 28, art 11; Gas Directive 2009/73/EC supra note 28, art 11} 31_{Communication from the Commission to the European Parliament, the Council, the European Economic and}

Social Committee, the Committee of the Regions and the European Investment Bank, COM(2015) 80 final [hereinafter Commission Communication Energy Union Strategy], pp 7

(18)

17

competence of some energy policy areas and creates a step to common energy policy32_and

Articles 170 – 172 TFEU on trans-European networks.

From the competition law perspective, it is taken as one of the tools to achieve the desired level of market integration. The business conduct of market participants can be affected and consequently the Energy market shaped by means of competition law enforcement and the tools it provides. Therefore, the regulatory framework of the energy sector cannot be complete without the Treaty provisions on competition concerning antitrust rules (Articles 101, 102, 106 TFEU), rules on State aid (Article 107, 108 TFEU), control of mergers regulated by the EU Merger Regulation33, and the Regulation 1/200334.

3. Antitrust decisions related to the European energy market

Competition law and its enforcement can not only force the undertakings to end their anticompetitive behaviour but it can significantly contribute to market integration and formation of the Energy Union, once it is used together with the regulatory instruments. In this regard, Commission’s leverage to enforce the antitrust rules laid down in Articles 101 and 102 TFEU under Regulation 1/2003 plays an important role as far as the Commission is entitled to oblige the undertakings to bring an infringement to an end and impose far-reaching behavioural or structural remedies.

In order to adjust the energy market design, the Commission was successfully adopting commitment decisions under Article 9 of the Regulation 1/2003 which were proposed by undertakings in order to satisfy the Commission´s concerns about their antitrust conduct. Since the commitments must relate to the findings previously expressed by the Commission, their implementation can result in considerable structural changes of the undertakings at issue. A commitment decision excludes a formal declaration about an actual infringement as well as it prevents the imposition of a fine or a penalty. However, once the approved commitments are violated, the fine can be imposed.35 For the Commission, it is sufficient to establish

32_{B Mellár, “Energy Policy: General principles“, (2016) Fact Sheets on the European Union, p 1, URL:}

http://www.europarl.europa.eu/ftu/pdf/en/FTU_5.7.1.pdf

33_{Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between}

undertakings (the EC Merger Regulation) [2004] OJ L24/1

34_{Supra note 1}

(19)

18

concerns about a cartel or an abuse of dominant position without proving a violation of Article 101(1) or 102 TFEU.

Antitrust and cartel electricity and gas cases initiated by the Commission and decided either by a decision accepting the commitments offered by the energy companies or by imposition of a fine under Regulation 1/2003 will be discussed below. The focus will be placed on structural remedies, their impact on energy market integration and their contribution to the implementation of regulatory instruments included in the third liberalisation package. Two antitrust cases which are subject to the judgement of the ECJ, one of them already decided while the other one still pending, will also be included due to the fact that both proceedings were opened by the Commission originally.

3.1. Electricity market

3.1.1. German electricity wholesale and balancing market case (2008) 36

The Commission made binding commitments offered by E.ON AG, Düsseldorf (E.ON) for the practices on electricity wholesale market (import and generation of electricity for resale) and balancing market in Germany, where E.ON was a vertically integrated company holding a dominant position within the meaning of Article 102 TFEU.

As regards the wholesale electricity market, E.ON was suspected of withdrawal of generation capacity by limiting the production in certain power plants as a part of its business strategy which raised prices on the short-term market, when more expensive plants (i.e. gas-fired instead of nuclear) were used to meet demand. The profit which E.ON lost due to lower generation was compensated by higher prices which were passed on to consumers. Moreover, long-term supply contracts were used to discourage new entries.

E.ON´s reaction to the investigation resulted in proposal of commitments which comprised of divestiture of high amount of its generation capacity to an independent undertaking.

Next, E.ON held a dominant position on the market for secondary balancing reserves, 37 while TSO who was its subsidiary, had a monopolistic position on the same market. TSO was

36_{German Electricity Wholesale Market (Case COMP/39.388) Commission Decision [2008]; German Electricity}

Balancing Market (Case COMP/39.389) Commission Decision [2008] OJ C36/8

37_{Balancing reserves compensate the fluctuations of the power grid caused by imbalances between energy}

required and produced in certain period. An energy generating undertaking can provide secondary balancing energy to compensate short-term fluctuations of the grid with the use of plants with a short response such as gas turbines. URL: http://www.energy2market.com/glossary-secondary-reserve.html

(20)

19

buying secondary reserves from its own affiliate instead of preferring cheaper sources, while passing on the additional costs to final consumers. Moreover, it prevented the importation of balancing reserves from other European producers by rejecting their prequalification so they would not be able to compete with E.ON. This was identified as an abuse of dominant position and discrimination of other European energy generators on grounds of their nationality.

E.ON proposed divestiture of its TSO while the purchaser could not be an undertaking operating in generation or supply business. This should have coped with the conflicts of interests and enhance the competition in transmission activities at the same time.

The case is an example how an undertaking with a market power can use its integrated structure to manipulate the energy market, increase prices, prevent entry, eliminate competition, and cross-border trade. The divestiture proposed by E.ON implemented ownership unbundling with power plants and transmission system being separated from the integrated company by applying competition law enforcement.

3.1.2. French long-term supply contracts case (2010) 38

Another case dealing with violation of the Article 102 TFEU concerned an abusive practice of French undertaking EDF with a dominant position on French market for the supply of electricity to large industrial customers. At the core of the anti-competitive objections raised by the Commission lied the practice of EDF to conclude exclusive long-term electricity supply contracts with large industrial customers which led to market foreclosure and exclusion of alternative suppliers. On top of that, the contracts contained resale restrictions which limited the competition on the supply market and lowered market liquidity.

By binding commitments, EDF undertook to return on average 65% of its contracted electricity volumes back to the market each year so it could became available to the competitors either because the contracts end or the customers were able to opt-out of their contract for free. Next, the duration of new contracts was shortened to five years and the customers were given a possibility to choose an additional supplier of their own choice even if the customer has a contract concluded with EDF.39 It was decided that the commitments will be applicable for ten years (by 2020) or unless market share of EDF will be below 40% in two

38_{Long-term contracts France (Case COMP/39.386) Commission Decision [2010]} 39_{Commission Press Release, IP/10/290 (17 March 2010)}

(21)

20

consecutive years. The resale restrictions were excluded for the future, while restriction clauses previously incorporated into the contracts became null and void.

Large industrial companies are attractive energy customers and their energy demand affects the market significantly. Locking them into long-term contracts was a strategic way how to discourage any potential competitors to enter the market and preserve the dominance of EDF. Although the remedy did not include unbundling of EDF, the outcome of this case suggested a useful benchmark for the duration of supply contracts with a dominant undertaking that the Commission is willing to accept and consider as not leading to market foreclosure.

3.1.3. Swedish Interconnectors case (2010)40

In the case of Swedish state-owned transmission system operator Svenska Kraftnät (SvK) with a monopoly on the electricity transmission in Sweden, the Commission assumed that it was abusing its dominant position and infringing Article 102 TFEU, as far as SvK was curtailing the export capacity on interconnectors situated along Swedish borders due to anticipated internal congestion on Swedish transmission network. By doing so, SvK treated domestic transmission services and domestic consumers in a more favourable manner than interconnector services and customers in neighbouring states, despite the required transmission capacity being available.41

The export transmission capacity limitation created discrimination between Swedish customers and customers in neighbouring EEA and EU Member States. Accordingly, it contributed to the internal market separation instead of its integration. The Commission identified not only possible abuse of a dominant position and violation of Article 102 TFEU but also discrimination on the basis of nationality and imposition of export restrictions and measures having equivalent effect, thus, breach of Article 18 TFEU and 35 TFEU, respectively.

40_{Swedish Interconnectors (Case COMP/39351) Commission Decision [2010]}

41_{The Swedish electricity market was characterized by different location of generation facilities and the energy}

consumption. Excess of generation could be found in the north while consumption dominated in the south. Energy needs to be transported from the north to the south of the country. Also, low cost generation methods are used (hydropower plants and nuclear plants) in amount that is capable to cover almost all domestic demand. Thus, the prices in Sweden were lower than in the neighbouring countries (except of Norway which uses hydropower). Consequently, Sweden was importing cheaper electricity from Norway while it exported energy to the south which requires to manage congestion during peak demand hours. SvK limited exports of electricity while reserving the electricity for domestic consumption. Ibid.

(22)

21

The accepted commitments included a subdivision of the transmission system into two or more bidding zones which would enable SvK to cope with congestion and prevent further limitation of interconnectors’ capacity.42 An exception was approved for so-called West-Coast-Corridor where the zonation could not be used due to lack of sufficient generation resources. Therefore, SvK undertook to build new transmission line within that area. In the interim period, congestion was to be managed by counter-trade within the zones.

The case suggested that the dominant transmission operators are not allowed to limit export transmission capacity on interconnectors and favour domestic consumers and generators in order to deal with internal congestion. An appropriate measure of congestion management was used as a remedy, i.e. a division of the Swedish transmission market into different price zones. Thus, enforcement of antitrust law and the related remedies promoted the cross-border trade through interconnectors and contributed to building new transmission capacity in certain part of Sweden.

3.1.4. Siemens/Areva case (2012)43

A German company Siemens AG (Siemens) is active in energy generation, transmission and supply while French Areva SA (Areva) provides business in offering power generation solutions. This cartel case was dealing with an alleged infringement of Article 101 TFEU due to implementation of disproportionate non-compete and confidentiality clauses agreed upon in a shareholders’ agreement concluded between Siemens and Areva in relation to a full-function joint venture Areva NP which they established to combine their business activities in area of nuclear power plants. The joint venture was mainly active in the construction of the nuclear islands for nuclear power plants. After the joint venture came to an end, Areva acquired sole control as a previous majority shareholder. The problematic part of the non-compete and confidentiality obligation was seen in its duration and its scope. According to the agreement, the clauses were to continue for 8 to 11 years beyond the lifetime of the joint venture (although later it was reduced to four years). The scope of the agreement which

42_{The bidding zones should create separate markets where the consumers and generators would submit bids}

indicating the required consumption and generation. If congestion occurs between the zones, the market clearing mechanism would automatically adjust the amounts of supply and demand and set different prices for the zones so that the amount of electricity transmitted between the zones would be equal to the capacity between the zones. This mechanism should have eliminated the congestion and the need to curtail the interconnectors’ capacity to neighbouring countries. Ibid. para 80

(23)

22

prevented Siemens to compete covered also activities unrelated to the joint venture´s main purpose.44_{Even though it was acknowledged that Areva NP was entitled to protect its}

business from misuse of information known to Siemens due to its previous participation in the joint venture, the restrictive obligations were found to be disproportionate and excessive. The Commission saw possible breach of competition by object and violation of Article 101 (1) TFEU.

The commitments accepted by the Commission defined a new scope and duration of Siemens´ obligations. Within the new post joint venture rules, Siemens was allowed to compete without any restrictions against Areva NP with an exception as regards activities marked as Areva NP’s core products and services in a period of three years. The use of confidential obligation was also reduced to three years and Siemens was prevented from providing third parties with confidential information of corporate, administration and technical nature.45

This case indicates, that while the cooperation between different undertakings at the EU level is inevitable in order to integrate the energy markets and approach closer to the single market and to the Energy Union, the collusion cannot lead to unjustified practices and cartels that violate the European antitrust rules. Although the commitment procedure did not lead to structural change of undertakings, it helped to form the market by bringing an agreement that prevented competition in compliance with the antitrust rules.

3.1.5. CEZ case (2013)46

In 2013, the Commission made binding commitments proposed by Czech state owned undertaking ČEZ, a. s. (CEZ) concerning the alleged abuse of its dominant position on the market for electricity generation and wholesale supply within the meaning of Article 102 TFEU. CEZ made pre-emptive reservation of capacity in the transmission system which did not correspond to its genuine generation projects. In other words, it limited the network capacity which could have been available for potential competitors. As a result of capacity booking, new market entry was prevented and the competition in the Czech production and supply market was hampered.

44_{Commission Press Release IP/12/618, (18 June 2012)}

45_{SIEMENS/AREVA (Case COMP/39736) Commission Decision [2012]} 46_{CEZ (Case AT.39727) Commission Decision [2013] OJ C 251/4}

(24)

23

Although CEZ first denied the Commission’s findings, it offered to divest company generation capacity eventually. The power plants, subject to the divestiture, had to be sold to an undertaking approved by the Commission while acquisition of any influence over these assets by CEZ was excluded for a period of 10 years.

This is another case where a national vertically integrated incumbent offered a divestiture of its assets by means of competition law and Commission’s intervention. It was objected, that even after the transfer of assets CEZ would still remain dominant on the Czech market. The Commission, however, did not see a problem in CEZ remaining dominant. As it stated, it was not dealing with the concentration level in the Czech market but with the potential abuse of CEZ’s dominant position. In this regard, the sale of generation capacity was considered to be enough appropriate remedy.

3.1.6. Power Exchanges case (2014)47

A cartel case which was not resolved by proposal of commitments but by imposition of fine concerned two undertakings, French EPEX Spot (EPEX) and Norwegian Nord Pool Spot AS (NPS), that were power exchanges providing spot electricity trading services. This included services to facilitate the trading, the management of the implicit allocation of cross-border interconnection capacities through market coupling, and services to third parties for the development and operation of spot electricity trading.48

Both undertakings established joint venture in order to discuss cross-border trade technical solutions.49 However, the cooperation at level of senior management of the companies spread behind consultations about harmonising projects enhancing cross-border trade. According to the Commission, the joint venture amounted to a cartel with an agreement to share markets and about collusive penetration into new markets in order to prevent attacks on each other’s territories. As a result, competition between the two undertakings was eliminated while their

47_{Power Exchanges (Case AT.39952) Commission Decision [2014] OJ C 334/5}

48_{Wholesale electricity can be traded on power exchanges and bilaterally (i.e. over-the-counter entailing bilateral}

transactions between a buyer and a seller, possibly assisted by a broker). Spot electricity trading enables to deliver traded electricity within a short period of time after the transaction, including cross-border interconnection capacity trading. Ibid. para 2(3), 2.1 (4)

49_{This cooperation was in line with the concept of the internal energy market as proposed in the Communication}

from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Making the internal energy market work, COM (2012) 663 final, according to which the power exchanges should participate in projects harmonising cross-border electricity flows (besides regulators, TSOs and the Commission).

(25)

24

actual position was strengthened. The companies’ behaviour created a single continuous infringement restricting competition by object within the meaning of Article 101 (1) TFEU. The cartel came to an end only after the Commission started the inspections. The Commission decided to impose a fine on both undertakings (EUR 3 651 000 and EUR 2 328 000, respectively).

The undertakings claimed that their initial wish was to contribute to integration of the energy markets but they “discussed European power market integration too closely with another

European power exchange.”50_{The case suggests a warning that close cooperation of}

stakeholders, although covered with a desire to enhance market integration, cannot be used as an excuse for a cartel and must take place within the limits set by EU competition rules.

3.1.7. OPCOM/Romanian Power exchange case (2014)51

Another decision concerning abusive practice of a power exchange where the Commission imposed a fine (EUR 1 031 000) due to violation of Article 102 TFEU was adopted at the same time as the previous case. A monopolistic operator of Romanian power exchange S.C. OPCOM S.A. (OPCOM), was accused of abusing its dominant position on the market for short-term (spot) electricity trading. The infringement consisted of a requirement imposed on EU electricity traders by OPCOM to obtain a Romanian VAT registration which was necessary in order to acquire access to the spot market on the power exchange while VAT registration issued by other Member State than Romania was not accepted. This practice not only constituted discrimination of the EU traders based on their nationality and place of establishment but also prevented new market entry, hindered competition, and reduced liquidity on the Romanian market.

OPCOM´s justification was based on an argument that it was preventing a cash-flow mismatch in VAT payments caused by financial transactions from abroad. It claimed that foreign traders carried out more purchase than sale transactions and without them to be a subject to VAT in Romania OPCOM had to pay out more VAT than it collected, and consequently seek reimbursement from the Romanian authorities which can take up to 170 days. These reasons were, however, not sufficient for the Commission. It pointed out that in

50_{G. Sebag, R Morison, “EU Fines Biggest Spot Power Exchanges in Sharing Case” Bloomberg (5 March 2014),}

URL: http://www.bloomberg.com/news/articles/2014-03-05/eu-fines-biggest-spot-power-exchanges-in-market-sharing-case (accessed 1 June 2016)

(26)

25

order to cope with the mismatch other possibilities existed (such as a loan from OPCOM´s parent company or revenues allocated by the national energy regulator). It also referred to the fact that power exchanges operating in other Member States dealt with similar issues in less restrictive manner.

3.1.8. Bulgarian Energy Holding case(2015)52

Case of possible abuse of dominant position of vertically integrated incumbent concerned territorial resale restrictions on the wholesale market for electricity. Contracts concluded between Bulgarian Energy Holding (BEH) and the traders contained clauses that imposed an obligation which laid down requirement where electricity can be delivered, while they excluded export.53 According to the Commission, the practice raised concerns about abusing behaviour of a dominant undertaking and about violation of Article 102 TFEU.

Besides an obligation to refrain from using contract clauses containing territory restrictions, BEH proposed commitments where it undertook to set up an independent power exchange that would offer for sale minimum predetermined volumes of electricity for a period of five years. This business model should establish anonymous trading of electricity and disable control over traders´ further resale. Moreover, the amount of electricity offered through power exchange should enhance the liquidity and transparency of Romanian energy market. Lastly, the ownership of the newly established power exchange should have been separated from BEH´s structures to the Bulgarian Ministry of Finance in order to safeguard its independence.

3.1.9. Greek lignite saga

Although the investigation of Greek public undertaking Dimosia Epicheirisi Illektrismou AE (DEI) with a dominant position on the market for lignite supply and wholesale electricity was initiated by the Commission, it was not resolved by means of a commitment decision.

The subject matter concerns a conferral of rights which authorised DEI to exploit lignite in Greece exclusively. Lignite is the cheapest primary source for energy in Greece, thus it is extremely interesting for energy business. The Commission assumed that inequality of opportunity between economic operators on the market of electricity production was created

52_{BEH Electricity (Case AT.39767) Commission Decision (not published yet, however, the commitments are}

already binding)

(27)

26

when DEI was granted privileged rights. Consequently, the dominant position of DEI was strengthened whereas new market entry was excluded. The Commission held that such practice was contrary to Article 106(1) TFEU in conjunction with Article 102 TFEU.54 Greece was called upon to take an appropriate measures to overcome the anti-competitive situation. Since Greece did not agree with the Commission´s findings, DEI brought an action against the decision. Subsequently, the General Court annulled the decision.55

In its reasoning, the General Court first focused on the relation between Article 106(1) TFEU and Article 102 TFEU. It held that while the former is addressed to Member States, the latter is dedicated to undertakings and prohibits abuse of their dominant position. In order to apply both articles in one case, the abuse of dominant position must be a prerequisite for establishing the infringement of Article 106(1).56 As far as the assignment of exclusive licensing and impossibility of other market operators to access the available lignite deposits was a result of the state`s action, it could not be imputed to DEI.57 It held that the mere exercise of exclusive rights and more favourable situation as a result of a state measure does not account for an abuse of a dominant position even though it creates inequality of opportunity on the market. Finally, it blamed the Commission for not establishing precisely what created the abuse of the dominant position.58

The Commission appealed against this judgement whereas the ECJ expressed a different opinion than the General Court. It declared that although an assignment of exclusive rights by a state measure which creates a dominant position of an undertaking does not as such violate Article 102 TFEU, in order to establish infringement of Article 106(1) TFEU in conjunction with Article 102 TFEU it is sufficient “to identify a potential or actual anti-competitive

consequence liable to result from the State measure at issue.”59_{In other words, it is sufficient}

that the Greek law created an opportunity for DEI to abuse its dominant position which is inseparably related to the conferral of exclusionary rights to exploit lignite without the need to prove the existence of actual abuse. The ECJ referred the case back to the General Court, thus, the final result has not yet been known.

54_{Greek lignite and electricity markets (Case COMP/B-1/38.700) Commission Decision [2008] OJ C 93/3} 55_{Case T-169/08 Dimosia Epicheirisi Ilektrismou AE (DEI) v European Commission [2012] OJ C 343/13} 56_{Ibid. para 86}

57_{Ibid. para 89} 58_{Ibid. para 92, 93,}

59_{Case C-533/12 P European Commission v Dimosia Epicheirisi Ilektrismou AE (DEI) (17 July 2014),}

(28)

27

This is an important case as regards the issues of abuse of a dominant position of undertakings operating on energy markets and the position held by the ECJ. It suggests that when the position of an energy undertaking is strengthened by a state measure which has a potential to restrict competition by limiting access for other competitors to enter the market, it can create an abuse of dominant position in breach with competition rules. It also suggest that tendencies of the Member States to grant exclusionary benefits to national incumbent companies persist, although to the detriment of other national competitors, as well as cross-border competition and the true integration attempts.

3.2. Natural gas market

Gas market was characterised by strong vertical integration of companies. Especially the owners of the transmission networks held very stable position since in most of the cases a construction of several pipelines was basically impossible. Companies willing to compete on the supply market were dependent on the TSO´s permission to access the networks. Integrated network operators usually used their strong position and by means of capacity allocation preferred their own subsidiaries. From the competition law perspective this may constitute an abuse of dominant position and breach of Article 102 TFEU. It is important to add that the transmission systems are generally considered to be an essential facility.60

3.2.1. RWE Gas Foreclosure (2009)61

In 2009, the Commission made binding commitments offered by a dominant German integrated undertaking RWE based on its structural unbundling. RWE was considered to abuse its position and infringe Article 102 TFEU by means of refusal to supply and margin squeeze. It has booked most of the capacities on its own transmission network on long term basis as a strategy to hold the transport capacity for itself and eliminate third parties access to the network.62 This was defined as a refusal to supply customers on downstream gas supply markets and violation of Article 102 TFEU. Next, RWE had intentionally raised its own network costs and charged high tariffs in order to squeeze margins of the competitors and

60_{According to the essential facility doctrine “if other undertakings are unable to establish certain facilities that}

are indispensable in order to provide a product or a service, then the discussed facility is essential.” P.

Szlagowski, “The abuse of dominant position through strategic underinvestment of energy transmission network interconnectors” [2010] 6 International Energy Law Review, p 201-205

61_{RWE Gas Foreclosure (Case COMP/39.402) Commission Decision [2009]} 62_{Ibid. para 22-27}

(29)

28

disable them to compete efficiently on the downstream market. The company also applied a rebate scheme that discriminated against other competitors as the conditions were applicable almost exclusively on RWE. It also charged high balancing fees within its balancing zones while exempting itself from the fee obligation due to negotiation of special agreements concluded with its own subsidiary.

Capacity booking and margin squeeze almost completely prevented other companies from establishing efficient competition on a market. RWE offered a divestiture of gas transmission network in order to eliminate competition concerns. In this case, the sale of network was seen as the most effective structural remedy which would prevent further misuse of control over pipelines.

3.2.2. ENI case (2010)63

Other issue concerning refusal to supply which raised Commission´s concern about misuse of dominant position and breach of Article 102 TFEU was a case of an Italian fully vertically integrated gas company ENI. Strategic operations on ENI´s own transmission network took the form of capacity hoarding (refusal to offer available or unused capacity despite strong demand from third parties and keeping of most of the capacity for itself by means of long term reservations), capacity degradation (offering the capacity on network in inconsistent, interruptible, and discouraging way with a view to deprive its value for potential competitors) and strategic underinvestment (a strategy to limit investments into transmission capacity in order to keep the level of existing competition on the downstream market low and to preserve its own profit).

In order to address the antitrust allegations, ENI undertook to sell the shares in the international gas transmission networks to the independent purchaser approved by the Commission.

Thus, structural unbundling of ENI was used as a remedy in order to resolve the conflicts of interest arising from the vertical integration. Interesting part of the Commission´s findings related to the question of strategic underinvestment into the transmission system and whether an undertaking, although vertically integrated with a dominant position on a relevant market, can be pushed into financial investments into construction of additional transmission capacities. As this case suggests, this issue shall be assessed in light of the essential facility

Towards the Energy Union through antitrust law enforcement