COMMITTED TO REFORM?
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COMMITTED TO R EFOR M?
Pragmatic Antitrust Enforcement in Electricity Markets
Małgorzata Sadowska
Cambridge – Antwerp – Portland
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.
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
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
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
Committed to Reform?
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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
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 . . . 27Figure 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
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