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COMMITTED TO REFORM?

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European Studies in Law and Economics Series

1. Group Litigation in European Competition Law. A Law and Economics Perspective, Sonja E. Keske

2. Behavioural Economics in Consumer Policy, Hanneke Luth

3. Ex-Post Liability Rules in Modern Patent Law, Rosa Castro Bernieri

4. Competition and Innovation in the EU Regulation of Pharmaceuticals: Th e Case of Parallel Trade, Claudia Desogus

5. Th e Law and Economics of Organ Procurement, Fırat Bilgel

6. Law and Economics in the RIA World. Improving the use of economic analysis in public policy and legislation, Andrea Renda

7. Regulatory Competition in European Corporate and Capital Market Law, Lars Hornuf

8. Economic Criteria for Criminalization: Optimizing Enforcement in Case of Environmental Violations, Katarina Svatikova

9. Defi nition of the Relevant Market. (Lack of) Harmony between Industrial Economics and Competition Law, Hila Nevo

10. Patents as Protection of Traditional Medical Knowledge? A Law and Economics Analysis, Petra Ebermann

11. Rethinking the New York Convention. A Law and Economics Approach, Shen Wei

12. Towards a Better Assessment of Pain and Suff ering Damages for Personal Injuries, Vaia Karapanou

13. Comparative Analysis of Merger Control Policy. Lessons for China, Jingyuan Ma

14. Does Law Matter for Economic Growth? A Re-examination of the ‘Legal Origin’ Hypothesis, Guangdong Xu

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COMMITTED TO R EFOR M?

Pragmatic Antitrust Enforcement in Electricity Markets

Małgorzata Sadowska

Cambridge – Antwerp – Portland

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Committed to Reform? Pragmatic Antritrust Enforcement in Electricity Markets Małgorzata Sadowska

© 2014 Intersentia

Cambridge – Antwerp – Portland

www.intersentia.com | www.intersentia.co.uk

ISBN 978-1-78068-250-1 D/2014/7849/113 NUR 823

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Intersentia v

ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to people who saw me through this book; to all those who provided support, talked things over, read, off ered comments and assisted in the editing, proofreading and design.

Particular thanks go to Massimo Motta, Klaus Heine, Bert Willems, Leigh Hancher, Ann-Sophie Vandenberghe, Hans Vedder, Roger Van den Bergh, Michael Faure, Luigi Franzoni, Firat Cengiz, Andrew Gavil, Natalia Fabra, Jan Bouckaert, Pierre Larouche, Niels Philipsen, Alexander Morell, Björn ter Bruggen, Paul Giesbertz, Martin Godfried, Lars Kjølbye, Peter Willis, Matti Supponen, Edouard Leduc, Marianne Breijer, Lisa Verniti, Adelio Garcia Alfi si, Meltem Bayramli, Vaia Karapanou, Alejandra Martinez Gàndara, Firat Bilgel, Weiqiang Hu, Bernadeta Sadowska, Mieczysław Sadowski, Paulina Samsel, Anna Sadowska, Nicolas Klecha, Maksymilian Klecha, Marcin Klecha and Killian Kehoe.

Th e views expressed and all remaining errors are those of the author.

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Intersentia vii

CONTENTS

Acknowledgements . . . v

List of Tables and Figures . . . xi

Chapter 1. Introduction . . . 1

1.1. Problem Defi nition . . . 2

1.2. Context . . . 4

1.2.1. What Are Commitment Decisions? . . . 4

1.2.2. Potential Benefi ts of Commitment Procedure and Incentives to Engage in Negotiations . . . 6

1.2.3. Making the Link with Electricity Markets . . . 10

1.2.4. What’s at Stake? Th e EU Internal Market for Electricity . . . 17

1.2.4.1. Early Legislative Reforms: the 1st and the 2nd Energy Package . . . 19

1.2.4.2. Th e Use of Competition Toolbox: the Energy Sector Inquiry and the Follow-Up Actions . . . 21

1.2.4.3. Where Do We Stand Now? Th e 3rd Energy Package . . . 24

1.2.4.4. Actions for Non-Compliance . . . 25

1.2.4.5. On the Home Straight? . . . 26

1.3. Energy Policy and Competition Policy: Defi nitions . . . 27

1.4. Dealing with Gap Cases: Some Comments on the Greek Lignite Case . . . 29

1.4.1. Th e Case . . . 30

1.4.2. Discussion . . . 33

1.5. Literature Review . . . 34

1.5.1. Debate on Commitments . . . 36

1.5.1.1. Optimal Use of Commitment Decisions . . . 38

1.5.1.2. Suboptimal Use of Commitment Decisions . . . 42

1.5.2. Debate on the Use of Commitments for Regulatory Purposes: Instrumentalisation . . . 43

1.5.2.1. Suboptimal Outcomes and the Risks of Instrumentalisation . . . 44

1.5.2.2. Formlessness of Article 9 and the Opportunities It Creates . . . 48

1.5.2.3. Some Final Remarks . . . 55

1.5.3. Research Justifi cation . . . 57

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Committed to Reform?

viii Intersentia

1.6. Research Question and Methodology . . . 59

1.6.1. Why Electricity Markets? . . . 60

1.6.2. Why the E.ON and SvK Cases? . . . 61

1.7. Chapter Overview . . . 63

1.7.1. Chapter 2 . . . 64

1.7.2. Chapter 3 . . . 66

1.7.3. Chapter 4 . . . 70

1.7.4. Chapter 5 . . . 74

Chapter 2. Energy Liberalisation: Excessive Pricing Actions Dusted Off ? . . . 79

2.1. Chapter Summary . . . 79

2.2. Introduction . . . 79

2.3. Th e Paradox . . . 81

2.4. Invalidating the Criticism . . . 82

2.4.1. Intervention might be Superfl uous or Even Harmful . . . 82

2.4.2. Assessment Problems . . . 84

2.4.2.1. Sector Inquiry Opens the Case… . . . 84

2.4.2.2. … And a Commitment Decision Closes It… . . . 87

2.4.3. Price Regulation . . . 89

2.4.3.1. … With a Structural Solution . . . 89

2.5. Conclusions . . . 90

Chapter 3. Energy Liberalisation in an Antitrust Straitjacket: A Plant Too Far? . . . 93

3.1. Chapter Summary . . . 93

3.2. Introduction . . . 93

3.3. Far-Fetched Concerns . . . 96

3.3.1. Dominance . . . 98

3.3.2. Abuse . . . 100

3.4. Far-Reaching Remedies . . . 103

3.4.1. Step 1: Alternative Behavioural Commitments? . . . 107

3.4.2. Step 2: Appropriate and Necessary Structural Commitments? . . 108

3.4.3. Commitments and Exploitative Concerns . . . 111

3.4.4. Commitments and Exclusionary Concerns . . . 115

3.5. Conclusions . . . 116

3.6. Annex 1 . . . 117

3.7. Annex 2 . . . 122

3.7.1. Spain . . . 122

3.7.2. Denmark . . . 123

3.7.3. Germany. . . 125

3.7.4. Th e UK . . . 126

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Contents

Intersentia ix

3.7.5. Italy . . . 128

3.7.6. Belgium . . . 129

3.7.7. Discussion . . . 130

Chapter 4. Market Integration and Economic Effi ciency in Confl ict? Commitments in the Swedish Interconnectors Case . . . 135

4.1. Chapter Summary . . . 135

4.2. Introduction . . . 136

4.3. Model . . . 138

4.3.1. Set-Up . . . 138

4.3.2. First-Best . . . 140

4.3.3. Scenarios . . . 143

4.4. Results . . . 146

4.4.1. Counter-Trading with Full Congestion Shift ing (Alleged Abuse) . . . 146

4.4.2. Counter-Trading without Congestion Shift ing (Interim Remedy as Implemented) . . . 151

4.4.3. Counter-Trading with Partial Congestion Shift ing (Optimal Interim Remedy) . . . 154

4.4.4. Market Splitting (Final Remedy) . . . 157

4.4.5. Comparison of Four Scenarios . . . 160

4.5. Conclusions . . . 163

Chapter 5. Power Markets Shaped by Antitrust . . . 169

5.1. Chapter Summary . . . 169

5.2. Introduction . . . 169

5.3. Th e Case and Its Context . . . 171

5.4. Internal Market Objective Reached with Competition Policy . . . 174

5.4.1. Political Climate and Legal Concerns Likely Delayed the Case . . 175

5.4.1.1. Political Climate . . . 175

5.4.1.2. Legal Concerns . . . 177

5.4.2. Commitment Procedure Simplifi es the Case . . . 179

5.4.3. Promotion of Market Integration as a Key Objective in the SvK Case . . . 180

5.4.4. Neglecting Objective Justifi cation . . . 183

5.4.4.1. Objective Justifi cation and Commitment Procedure . . . 183

5.4.4.2. Objective Justifi cation Based on Effi ciencies . . . 186

5.4.4.3. Objective Justifi cation Based on Public Interest . . . 187

5.4.5. Proportionality of the Final Remedy . . . 189

5.5. SVK’s Commitments in the Light of the Nordic Debate . . . 191

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Committed to Reform?

x Intersentia

5.6. European Rules on Congestion Management . . . 197

5.6.1. Existing EU Rules on Congestion Shift ing . . . 198

5.6.2. Existing EU Rules on Congestion Shift ing: What Do Th ey Mean for the TSOs? . . . 200

5.6.3. Th e New CACM Network Code and Its Impact on Congestion Shift ing . . . 203

5.6.4. Limits of the EU Regulation . . . 207

5.7. Conclusions . . . 209

Chapter 6. Conclusions . . . 213

6.1. Energy Policy Dimension . . . 213

6.1.1. Regulatory Objectives Pursued by the Commission . . . 213

6.1.2. Overcoming the Limits of Sector-Specifi c Regulation . . . 214

6.1.3. Overcoming Political Opposition . . . 216

6.1.4. Th e Commission’s Bigger Toolbox for Regulatory Purposes . . . 217

6.2. Competition Policy Dimension . . . 218

6.2.1. Suboptimal Case Selection and Prioritisation (1a) . . . 219

6.2.2. Suboptimal Antitrust Response (1b) . . . 221

6.2.3. Pro-Article 9 Bias (2) . . . 222

6.2.4. Th e Commission’s Smaller Toolbox for Regulatory Purposes . . . 222

6.3. Addressing the Research Question . . . 223

6.4. Scope for Further Research . . . 224

Chapter 7. Summary . . . 227

References . . . 231

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Intersentia xi

LIST OF TABLES AND FIGUR ES

TABLES

Table 1. Overview of antitrust cases closed by commitment

decisions between 2004 and 2014 . . . 13

Table 2. Energy antitrust investigations launched by the Commission between 2004 and 2014 . . . 15

Table 3. E.ON’s generation capacity by sources: Germany, 2007 . . . 109

Table 4. E.ON’s divested capacity by sources: November 2008 . . . 110

Table 5. E.ON’s generation portfolio post- versus pre-divestiture . . . 111

Table 6. Data for the numerical illustration . . . 140

Table 7. Four scenarios . . . 145

Table 8. Numerical results for four scenarios . . . 149

FIGUR ES

Figure 1. Well-functioning and competitive electricity markets according to my nephews and my sister . . . 27

Figure 2. Positioning the research topic in the context of current scholarly debates . . . 35

Figure 3. Th e concept of proportionality under Article 7 and Article 9 of EC Regulation 1/2003: comparison . . . 105

Figure 4. Merit order curve for Germany, 2008 . . . 112

Figure 5. Price formation on a short-term competitive electricity market . 117 Figure 6. Th e eff ect of capacity withdrawal on price formation in a competitive short-term electricity market . . . 119

Figure 7. Set-up of the model . . . 139

Figure 8. First-best outcome . . . 142

Figure 9. First-best: gross consumer surplus and production costs . . . 142

Figure 10. Counter-trading with full congestion shift ing: regional prices, import and export quantities . . . 148

Figure 11. Counter-trading with full congestion shift ing: producer surplus and consumer surplus . . . 150

Figure 12. Counter-trading without congestion shift ing: regional prices, import and export quantities . . . 152

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Committed to Reform?

xii Intersentia

Figure 13. Counter-trading without congestion shift ing: producer

surplus and consumer surplus . . . 153 Figure 14. Counter-trading with partial congestion shift ing: regional

prices, import and export quantities . . . 155 Figure 15. Counter-trading with partial congestion shift ing: producer

surplus and consumer surplus . . . 156 Figure 16. Market splitting: regional prices, import and export quantities. . 158 Figure 17. Market splitting: producer surplus and consumer surplus . . . 158 Figure 18. Market splitting with strategic congestion: regional prices,

import and export quantities . . . 159

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