SPEECH/03/447
Prof. Mario Monti
European Commissioner for Competition Policy
Applying EU Competition Law to the
newly liberalised energy markets
World Forum on Energy Regulation
Rome, 06 October 2003
It is a great honour for me to participate in this Forum. Its success in Montreal in
2000 fully justifies both the decisions to make this event a regular one, as well as
the European Commission's backing to this initiative.
Liberalisation and Competition Policy
This edition of the Forum rightly emphasises the importance of the regulatory role in
relation to energy markets.
This role is indispensable for at least two reasons. First, because in these network
industries the network constitutes a natural monopoly, that is to say, the duplication
of the network is not economically feasible. Since supply of electricity and gas
requires transport through those networks, regulatory intervention is needed to
frame the activity of the network operator, even in cases where there is not a
vertical integration of the network operator with a supply business.
The second reason why regulatory intervention is so essential in electricity and gas
markets in the European Union at the moment is their current state of liberalisation.
It is vital that liberalisation is accompanied by the appropriate regulatory measures
to ensure that it progresses smoothly. These measures must in particular address
security of supply concerns, as the European Commission has repeatedly pleaded
and proposed. I do not need to give you an example of the consequences that
overlooking security of supply might have. The experience of these consequences
is still very recent both in Europe and the US.
Thus the importance of the Regulators' tasks is obvious.
Full market opening for electricity and gas in the European Union was decided by
the European Union legislator in June this year. This decision is a key element to
achieve a level playing field in the European Union, so that all consumers can
benefit from energy liberalisation. The current partial and different degree of market
opening among Member States will disappear in 2007. I am glad to say that
liberalisation of the energy markets has become irreversible in the European Union.
Against this background, both European Regulatory and Competition Authorities
strive to tackle the remaining barriers to an effective market, fully respecting
security of supply and environmental objectives. The strengths of the regulatory and
the competition approaches have the same objectives and reinforce each other.
Only the instruments used by Regulators and Competition Authorities differ.
However, some questions are more akin to be dealt with competition rules, while
others can be better treated with regulatory instruments, as we will see later.
EU competition rules are designed not only to protect the efficient allocation of
economic resources, but also to promote the creation of an EU wide internal market
by dealing with situations that affect trade among Member States. Barriers to
competition affecting trade among Member States can derive, for instance, from
contractual arrangements, such as territorial sales restrictions. I will come back to
this topic in detail later on.
Market integration in the EU is thus supported by the enforcement of the three main
competition instruments, namely: antitrust (Articles 81, 82, and 86 EC Treaty),
merger control (Regulation n° 4064/89), and state aid control (Articles 87 and 88 EC
Treaty). All these instruments interact and support each other in promoting
competition, notably in liberalised markets.
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Competition policy in the energy sector
In my view, at least two conditions need to be fulfilled in order to achieve a structure
favourable to competition in the electricity and gas markets. These two conditions
constitute our priorities when applying EU competition rules.
Increasing energy supply competition
As a first condition, we need to introduce and maintain a supply structure favourable
to competition. This is an area where typically Regulators have less power than
Competition Authorities to act. We use competition rules to protect or even improve
the supply structure of electricity and gas markets removing any obstacles that
prevent suppliers from competing with each other. In this sense, effective supply
competition is the other side of the medal to effective customer choice.
Protection of competition and of the supply structure is the rationale behind antitrust
rules, but also behind merger control and State-aid rules. As a general remark, I
would like to indicate that mergers can have pro-competitive effects, for example if
they allow new operators to enter national markets dominated by former legal
monopolies. They can, however, also have negative effects on competition for
example if they strengthen the dominant position of a former monopoly. Regarding
State-aid control, this also enables the Commission to ensure effective and
undistorted supply competition by preventing firms from enjoying unfair financial
advantages over their competitors. At the same time, antitrust rules can be used not
only to protect, but also to improve the supply structure.
This is true for horizontal agreements detrimental to competition, as well as vertical
arrangements having negative effects on supply competition. With respect to the
vertical restraints, we concentrate currently on territorial sales restrictions and
clauses having similar effects, such as profit splitting mechanisms, which are
particularly prevalent in gas markets. All these restrictions limit the possibilities for
the buyers to resell the gas and thus to create more supply competition in the gas
markets.
To give you an idea of our work in practice, I will illustrate to you how we use
antitrust rules, with a concrete example of a case in which we have made
substantial progress very recently.
As you might know, for some time we have been aware of territorial sales
restrictions in supply contracts between gas producers and European wholesalers.
These clauses prevent wholesalers from reselling the gas outside the countries
where they are established. This breaches European competition law and
undermines the on-going creation of a European gas market.
Our investigations covered, among others, the relations between Gazprom, the
Russian gas producer, and ENI, the Italian oil and gas company.
Today, I am glad to announce that the Commission and the companies concerned
have reached a settlement. This settlement was made possible because the
Commission did not initiate formal procedures, as would have been the normal
course of action, but allowed the companies concerned to find a commercial
solution for the competition problem we identified. This goes to show that during the
initial delicate transition phase from monopolised to liberalised energy markets, the
focus should lie, in some occasions, on Commission's interventions improving
effectively the market structure, rather than on formal procedures imposing fines.
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The settlement reached with the companies consists of two main elements. The first
relates to contractual issues, namely the amendments to remove the restrictive
clauses from the existing gas supply contracts as well as the commitments for
future market behaviour. The second element relates to accompanying measures to
be taken by ENI to promote the creation of a real European gas market.
As regards the contractual issues, it should be noted in the first place that ENI will
no longer be contractually prevented from reselling outside Italy the gas it buys from
Gazprom. At the same time, Gazprom will also be free to sell to other customers in
Italy without having to seek ENI’s prior consent. Both companies also declared that
they would not make use of territorial sales restrictions in future gas supply
contracts.
Concerning the accompanying measures, ENI agreed to offer significant gas
volumes to new customers outside Italy. I expect that the main beneficiaries of this
commitment will be consumers in Austria and Germany. The fulfilment of this
commitment should lead to more liquidity in these gas markets.
I consider this settlement to be a major breakthrough for the creation of a gas
market in the European Union. At the same time, the settlement demonstrates that
the validity of long term supply contracts – a common feature in the gas industry - is
not put into doubt as long as they do not contain anti-competitive clauses.
Following the example set by this settlement, I trust that Gazprom will soon bring its
contracts with other European importers into line with EU competition law.
I also hope that the settlement of the Gazprom/ENI case concerning supply
contracts will encourage the Algerian gas producer Sonatrach to follow the same
path. Sonatrach recently took the very welcome step of confirming to the
Commission that it too would not make use of territorial resale restrictions in future
contracts and that it would enter into commercial discussions with its customers to
amend the existing contracts. I welcome these positive developments, even if the
progress made in these discussions has, until now, been slow. My services
therefore recently called upon Sonatrach and its contractual partners to accelerate
their discussions.
All in all, I believe that we have made a promising start to solving the issue of
territorial sales restrictions without which the creation of a true European gas market
for the benefit of European customers would remain incomplete.
Network related issues
I wish now to address the second condition necessary to achieve a structure
favourable to competition in the electricity and gas markets.
This condition is the effective, transparent and non-discriminatory access regime to
energy transmission and distribution networks. Since gas and electricity networks
are natural monopolies, third party access to the networks is a pre-requisite for
effective competition in energy markets. Without such a regime, alternative
suppliers cannot reach customers.
The development of an effective third party access system requires a nondiscriminatory and cost-reflective tariff, as well as capacity allocation methods
minimising refusals of access to the network in Europe. This is particularly important
for cross-border trade between neighbouring Member States where transport
capacity tends to be scarce, and where access refusals may be detrimental not only
to competition but also to the completion of the EU internal market.
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Third party access is of course a major task for European Regulators, who are
possibly better equipped that Competition Authorities to address this issue. The
Commission is assisting Regulators through the so-called Florence and Madrid
Fora. By the way, the "Florence Forum" moved last year to Rome.
These two Fora are gathering the main stakeholders to discuss and develop
common approaches and guidelines for, among other subjects, tarification and
congestion management.
Contrasting with this comprehensive and possibly prescriptive and ex-ante
regulatory approach, the European Commission, as a Competition Authority, can
normally only prohibit particular individual behaviour and this only ex-post. However,
our objective is the same, i.e. to promote effective third party access to the
electricity and gas networks.
With regard to the settlement reached between the Commission, Gazprom, and
ENI, which I have already mentioned, we were able to come to a more constructive
result also for network access. In order to settle the case, ENI has agreed to
promote the increase of the capacity on the pipeline that transports Russian gas
from the Austrian/Slovak border to the Italian border. ENI will also support the
improvement of the third party access regime to this pipeline. The main
beneficiaries of this commitment will be customers in Italy, who are interested in
buying Russian gas and entering into competition with ENI.
Also in the context of merger cases we have been able to address network related
issues. For example, in the EDF/Hidrocantabrico merger. We noted the risk that
the joint acquisition of the Spanish electricity company Hidrocantabrico by EDF
would have led to the strengthening of the existing collective dominant position on
the Spanish wholesale market for electricity. Having gained a foothold in Spain and
with the access to Hidrocantabrico's significant electricity generation capacity, EDF
would probably have resisted any increase in the commercial capacity of the
interconnector which transmits electricity between France and Spain, which was
already scarce. This barrier for imports would have limited the pro-competitive
impact of the operation on the Spanish market. In order to eliminate these
concerns, EDF undertook to substantially increase the commercial capacity up to
about 4000 MW on the interconnector between France and Spain, thereby creating
the conditions for greater electricity trade volumes to and from Spain, to the benefit
of Spanish customers.
In all of these cases the Commission carried out its investigations in close cooperation with National Authorities, be it Regulatory Authorities or National
Competition Authorities. The idea was not to appropriate itself of an area of activity
which is normally the primary competence of Regulators.
Final remarks
Allow me to underline as a conclusion the complementary and not competing nature
of regulatory powers and of competition law. If Competition Authorities and
Regulators in Europe, as well as in North America, combine their forces, they
should be able to achieve more than each would be able to achieve on its own. This
calls for close co-operation in the interest of fully competitive energy markets,
notably in Europe.
I hope that our discussion today will usefully contribute to the debate on regulatory
and policy concerns in the energy markets. I fully support the development of this
exchange of ideas, which seems to me very valuable to achieve the commonly
shared objective of increasing consumer welfare.
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