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Eu Competition Law Sector Inquiry

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The overall objective of the Competition Law Sector Inquiry is to address the barriers currently impeding the development of a fully functioning open and competitive energy market throughout the EU by 1 July 2007. The Competition Law Sector Inquiry has highlighted three major "problems areas" which are causing the European internal energy market to not function properly:

1. It is too highly concentrated (incumbents have very high market shares in their respective national markets). This restricts competition at the wholesale and retail level, as new entrants are dependent on a vertically integrated incumbent for services through the supply chain.

Proposed actions

* In the context of merger control, implementation of structural remedies such as divestiture requirements to prevent further market concentration.

* Introduction of energy release plans to develop market liquidity and reduce the effect of concentration. This includes electricity virtual power plant auctions and gas release plans which require incumbent companies to sell defined volumes of energy, usually on large scales, combined with the release of network capacity.

* Analysis by the national regulators of the conditions in their respective markets in co-operation with competition authorities in order to develop further measures to increase liquidity in the market. Some Member States have already introduced ceilings on ownership of electricity generation and long-term contracts to reduce market power by divestiture of production, asset swaps and contract releases.

2. It is characterized by a high degree of vertical integration - between generation, supply and network - leading to a lack of equal access and insufficient investment (insufficient unbundling of network and supply activities). Despite current rules on non-discriminatory third party access (TPA), vertically integrated companies are suspected of favoring their affiliates. One concern is that decisions will be taken on the basis of the supply interest of the company rather than in the interest of the network. There is also a lack of necessity for companies to trade on the wholesale markets which hinder the development of liquidity, resulting in non-transparent prices creating distrust among both customers and potential competitors.

Proposed actions

* Complete ownership unbundling as it is considered to be the most effective means to ensure choice for energy users and to encourage investments. This type of proposal has to date been politically unacceptable to some Member States on the basis that it would amount to expropriation of shareholders' assets and would endanger security of supply. Currently only a few Member States have implemented full ownership unbundling for energy networks.

* Alternatively creation of an independent system operators (ISO) in which vertically integrated companies would remain owners of their network (and receive a regulated return on them) but would not be responsible for their operation, maintenance or development. This solution requires accurate regulation and will not deal with the key issue of disincentives to invest in networks. Such a system is currently applied in the UK. This proposal is a compromise solution in the event that the opposition to ownership separation is insurmountable.

3. There is a lack of cross-border integration and cross-border competition. Inadequate investment in cross-border connections, long-term legacy contracts and under-utilization of existing capacity, especially through ineffective congestion management, restrict cross-border trading and sales which are essential to create a single market.

Proposed actions

* Monitoring of the compliance with use-it-or-lose-it rules.

* Creation of a regulatory framework to ensure adequate TPA to gas storage facilities including legal unbundling, binding guidelines on TPA, and increased powers of the national regulators.

* Creation of a working group to monitor investments in generation, production and network capacity, particularly cross border capacity, and development of a clear framework for investment in networks.

* Coordination between transmission system operators (TSOs) to be enhanced through a new legislative framework based on existing associations of TSOs which requires information exchange, technical co-operation, development of standards and monitoring with a view to the development of a regional system of operators.

Are the Commission's proposed actions likely to achieve its desired objectives?

First, to deal with the concentration issue the Commission has the power to investigate and punish anti-competitive conduct by energy companies with heavy penalties as well as forced structural remedies if infringements are found (for instance force unbundling of large vertically integrated companies abusing their dominant position). However, it is clear that its power is limited to market liberalization problems with a EU dimension. One recent example where the Commission found itself powerless to act is the decision over Gas Natural/Endesa, in which the Commission was unable to look at the merger, as two thirds of the turnover of the relevant undertakings was generated in a single member state. Any



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