UK: European Commission Publishes Final Report On Its Energy Sector Inquiry

Last Updated: 16 January 2007
Article by Guy Lougher

The European Commission (the ‘Commission’) has published the final report on its inquiry into the European energy sector. The report states that consumers and businesses are not receiving the best value from European gas and electricity markets. The Commission intends to apply the full extent of its competition enforcement powers in addressing the problems the inquiry has identified.

The EU has been liberalising its energy markets and steadily introducing competition into the sector in an attempt to improve the efficiency of Europe's energy companies. However, while some progress has been made, the Commission considers that a number of obstacles to effective competition remain, and it has identified what it believes to be ‘a number of serious shortcomings…[that are] preventing European energy users and consumers from reaping the full benefit of the liberalisation process’. The Commission believes that these ‘shortcomings’ are causing markets to be inefficient and it believes that they ultimately lead to businesses and consumers paying too much in energy bills.

In its report the Commission announced its intention to remedy a variety of inefficient and anti-competitive practices that it has identified. The Commission has also disclosed it "has received a number of very interesting complaints". It is likely that those complaints will provide a focus for the Commission's future enforcement actions.

Alan Davis, Competition Partner at Pinsent Masons, commented: ‘there is a strong chance that some companies in the energy sector will be subjected to further scrutiny by both the Commission and national competition authorities. Investigations have already begun in Germany and more are likely to follow. The report has highlighted certain significant failings and the Commission is clearly braced to pursue individual enforcement actions,much like it did after its investigations into the telecoms sector in 1999 and 2000. It is also likely that the Commission will use its legislative and competition enforcement powers to try and achieve unbundling by those gas and electricity suppliers that also control transmission infrastructure.’

What next?

If necessary, the Commission can use its powers of competition enforcement and legislative action to address specific problems in the following ways:

Structural unbundling: i.e. the process of separating ownership of electricity and gas networks in the upstream market from the downstream commercial activities of energy companies. The Commission considers that this structural unbundling could dilute the risks to security of supply which it believes arise when companies own and operate networks at all levels of the production, supply and distribution chain. The Commission also believes that unbundling is necessary in order to encourage new entrants into the relevant markets.

Individual enforcement: the Commission can launch investigations into the conduct of companies suspected of anti-competitive behaviour (for example, the recent dawn raids carried out at the four incumbent electricity generators and suppliers in Germany) under Articles 81 and 82 of the EC Treaty. Such investigations could result in large fines being imposed on companies found to have breached the rules.

Use of the State aid rules: the Commission believes that State subsidies may act to preserve concentrated markets and discourage market liberalisation. Therefore, the Commission is likely to apply the State aid rules more aggressively when it identifies Member States that are subsidising national energy companies to the detriment of competition.

Merger control: mergers in the energy sector are likely to be scrutinised by the Commission much more closely in the future under the EU merger control rules. In practice this is already happening, as shown by the intensity of the Commission's scrutiny of the proposed GdF/Suez merger.

Regulatory change: the Commission believes that changes are needed to the EU regulatory environment. Specifically, the Commission considers that the powers of independent national energy regulators should be enhanced, whilst reinforcing the links between national regulators and harmonising energy regulation in cross-border issues. Alan Davis commented further: ‘Although the Commission has very significant powers at its disposal, the break up of large vertically integrated energy groups by the Commission would represent an unprecedented step. Nevertheless, the Commission appears to be squaring up for a fight ‘.

For further information, please refer to the report:

Pinsent Masons' EU & Competition Group is one of the largest specialist competition teams in the UK, with considerable experience and expertise of advising clients on competition law issues in the energy sector. It also has considerable experience of advising on OFT market studies and Competition Commission market investigations, including having advised on the recent Store Cards, Home Credit and ongoing Groceries market investigations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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