Content

Part 4 Competition in the European Energy Markets in:

Cansu D. Burkhalter

Legal and Regulatory Framework of European Energy Markets, page 133 - 252

Competition Law and Sector-Specific Regulations

1. Edition 2020, ISBN print: 978-3-8288-4429-2, ISBN online: 978-3-8288-7440-4, https://doi.org/10.5771/9783828874404-133

Series: Wissenschaftliche Beiträge aus dem Tectum Verlag: Rechtswissenschaften, vol. 127

Tectum, Baden-Baden
Bibliographic information
Competition in the European Energy Markets Sector-Specific Rules for Energy Markets Liberalisation in the energy markets implies the creation of a market which can support an effective competitive environment. In monopolistic markets, undertakings with a dominant position tend to abuse their position. Such an abuse may lead to numerous market failures, i.e., preventing the new competitors from easily entering into the market, manipulating access tariffs and violating consumer rights.540 In order to protect and promote competition in a market with complementary competitive and non-competitive regulated segments, policymakers can use a number of sector-specific “tools”. These tools can be generally categorised into two groups: structural measures, which mainly focus on the incentives of undertakings to restrict or hinder competition, and behavioural measures, which mainly focus on controlling undertakings’ ability to restrict competition. While access regulation, price regulation and quality regulation are considered behavioural measures, vertical ownership separation and divestment of assets are structural remedies.541 Operational separation, being kind of hybrid, falls somewhere between these two categories.542 In the EU, the liberalisation of the energy markets has focused on key issues such as the structural separation of the competitive segments (energy production and supply activities) from the non-competitive regulated segments (operation of transmission and distribution networks and other essential infrastructures), non-discriminatory third-party access regime to networks and other essential infrastruc- Part 4 § 7. 540 Cabau & Sandberg, 2016, p. 92. 541 OECD, 2001, p. 53. 542 Mulder et al., 2005, p. 22. 133 ture, gradual removal of exclusive supply rights and the establishment of independent regulatory authorities with effective powers.543 Unbundling Network industries, such as electricity and natural gas, have a structure in which a non-competitive component of the industry is vertically integrated with a potentially competitive component. The basic problem that arises in this context is that the owner of the non-competitive component may have both the incentive and the ability to restrict competition in the competitive component by controlling the terms and conditions at which rival firms in the competitive component have access to the non-competitive component.544 The degree of unbundling varies from sector to sector.545 In telecommunication, postal service and railways, the degree of unbundling is not the same as in the energy sector. This situation is explained by political resistance, technical properties of sectors, the potential magnitude of reconfiguration costs, the proportionality principle expressed by the fact that measures should be proportional to the objective of increasing competition, and public policy issues such as public and universal service obligations.546 Electricity and natural gas are transferred to their place of consumption through grids and pipelines.547 Since no alternative method of carrying electricity and natural gas is available, the natural monopoly feature of energy networks is more conspicuous than that of other networks.548 Furthermore, in comparison to other sectors, as it is I. 543 Kroes, 2007, p. 1389. 544 OECD, 2001, p. 7. 545 Mulder et al., 2005, p. 23. 546 Ehlers, 2010, p. 120. 547 In the electricity and gas sectors, natural monopolies exist on both the national level and the regional level. On the national level, electricity is transported by a highvoltage grid called the transmission network, and natural gas is transported by the high-pressure grid. On the regional level, low-voltage grids for electricity and lowpressure grids for gas constitute distribution networks. The transmission network plays a crucial role in coordinating generation in order to achieve equilibrium between supply and demand in the most efficient way at every moment of time. Mulder, Shestalova, & Lijesen, 2005, p. 20. 548 Praduroux & Talus, 2008, p. 4; Midttun, 2001, p. 27. Part 4 Competition in the European Energy Markets 134 simple in a technical sense and economically viable, a more comprehensive unbundling practice can easily be realised in the energy sector.549 Prior to liberalisation, European energy markets were characterised by the state-owned vertically integrated undertakings which were active in all market segments including generation/supply and distribution/transmission.550 Due to the natural monopoly characteristic of both the electricity and gas networks551, the main activities, such as production and supply, should be unbundled from transmission and distribution activities to enable and increase fair and equal market access in energy markets and to decrease non-competitive and discriminative behaviours against rivals.552 This is the underlying objective of unbundling: separate the competitive553 from the non-competitive554 segment in order to prevent misuse through the control of the latter and prevent situations which may give rise to a conflict of interests and incentives.555 In short, unbundling in energy markets means “running 549 Ehlers, 2010, p. 124. 550 Cabau & Sandberg, 2016, p. 91. 551 Electricity and gas are required to be transferred to the areas where they are consumed and distributed to the end customers. Such a course of action is implemented through pipelines and electricity grids. Once a network has been constructed, it would be extremely difficult to construct a competing network: sunk costs for construction are extremely high, environmental issues (including opposition from environmental groups) are present and demand risks are significant – all this together with the advantage of the established operator militates against a potential market entrant. This makes it virtually impossible to construct a competing network. The network infrastructure thus is considered an essential facility, which means that access to such infrastructure is vital for undertakings wishing to carry out business in the energy markets. Talus, 2011, p. 72. 552 Thomas, 2007, pp. 3–4. 553 The activities in the energy sector which are usually competitive: electricity generation, electricity “retailing” or “marketing” activities, electricity market trading activities, gas production, gas storage (in some countries), gas “retailing” and “marketing” activities. OECD, 2001, p. 8. 554 The activities in the energy sector which are usually non-competitive: high-voltage transmission of electricity, local electricity distribution, high-pressure transmission of gas and local gas distribution. Ibid. 555 “This is the underlying objective of unbundling: separate the competitive from the non-competitive segment in order to prevent misuse through the control of the latter.” Praduroux & Talus, 2008, p. 4. The 1988 Communication from the EC on the IEM considered horizontal and/or vertical integration of the industry (in particu- § 7. Sector-Specific Rules for Energy Markets 135 energy transmission and distribution networks independently from the production and supply side”.556 As networks in energy markets are considered essential for undertakings operating in the upstream and downstream markets, the establishment of the competitive markets depends on the non-discriminative behaviours of the undertakings which control the networks. All kinds of unbundling — legal, operational, accounting, ownership unbundling — apply to energy suppliers that are transmitting electricity through a high-voltage or extra-high voltage system or gas through high-pressure pipeline networks and at the same time fulfil at least one other market function such as the supply of energy, the generation of electricity or the production of gas.557 As mentioned above, unbundling can be accomplished to different degrees. In general, more comprehensive unbundling models are required for the transmission networks as compared to the distribution networks. In terms of the transmission networks, unbundling requirements generally focus on the ownership unbundling which prohibits any production and supply undertaking from owning the majority share of a transmission system. The other two models are transmission system operator and independent system operator. In terms of the distribution networks, the unbundling requirements focus on the legal, accounting and functional/management segregation.558 Although the aforementioned unbundling models provide for different degrees of structural segregation of network activities from production and supply activities, it is expected that each of them is to be effective in resolving any conflict of interests between producers, suppliers and transmission system operators. In other words, they should remove the incentive for vertically integrated undertakings to discriminate against competitors regarding access to the network, access to commercially relevant information and investments in the network.559 lar, the integration of network businesses with production and supply businesses) to be one of the main obstacles to the creation of a true internal EU energy market. Guayo et al., 2010, p. 329. 556 Zafirova, 2007, p. 29. 557 Malmendier & Schendel, 2006, p. 366. 558 Rodríguez, 2014, p. 10. 559 European Commission, The Unbundling Regime, 2010, p. 4. Part 4 Competition in the European Energy Markets 136 According to Mulder et al., “unbundling breaks links between the network company and commercial activities. The stronger the unbundling, the more links are broken. This provides more independence to the network, which affects performance of the network company itself, as well as performance in the other parts of the electricity supply chain.”560 The unbundling of activities within a former vertically integrated company minimises distortions in a single European electricity or gas market by ensuring transparent and non-discriminatory terms of transmission access for third parties and curtailing the risks of cross-subsidisation561 of the generation and supply activities of incumbents.562 Other benefits expected from unbundling include increased transparency in the energy sector, the facilitation of the undertakings’ access to accurate information, the elimination of market closure563 risk, the encouragement of competition and an increased effect of sector-specific regulations through more effective market regulation. Unbundling in Transmission Ownership Unbundling The most advanced and radical unbundling model is ownership unbundling. Under this method, the ownership of a transmission network has to be transferred to a completely independent undertaking, which would also exclusively operate this network.564 In other words, former vertically integrated generation and supply undertakings are no longer allowed to exercise any direct or indirect control over the independent network operator. According to Buschle, the introduction of ownership unbundling was a reaction to one particular barrier to the A. 1. 560 Mulder et al., 2005, p. 43. 561 Unbundling is considered as a proper tool used to prevent the cross-subsidy practices of a vertically integrated company, inclusive of its cost and profit-loss transfers among the different activities. 562 EFET, 2000, p. 1. Unbundling reduces the incentive of the provider of the noncompetitive activity to restrict competition in the competitive activity. This is an important advantage because it lessens the regulatory burden, enhancing the quality of the regulation and the level of competition. OECD, 2001, p. 21. 563 Market closure is defined as a strategic conduct by one or more undertakings to prevent potential rivals from entering into downstream or upstream markets. 564 Pielow et al., 2009, p. 99. § 7. Sector-Specific Rules for Energy Markets 137 opening of electricity and gas markets, namely the proprietary rights of incumbents – vertically integrated undertakings – over their networks.565 Article 9 of Directive 2009/72/EC and Directive 2009/73/EC set out rules regarding the ownership unbundling. The conditions specified in Article 9(1)(a)–(1)(d) have a cumulative structure.566 Under Article 9(1)(a) each undertaking having the ownership of the transmission system should act as a TSO567. According to Article 9(1)(b)(i), a person who is entitled to exercise control over an undertaking performing generation or supply function, cannot exercise control568 or exercise any right569 over a transmission system operator/transmission system or vice versa570.571 Article 9(1)(c) and (d) provide for two additional requirements. According to Article 9(1)(c), the same person is not entitled to appoint members of bodies legally representing572 a TSO or a transmission system and to exercise control, directly or indirectly, or any right over an undertaking performing generation or supply functions. Furthermore, Article 9(1)(d) prohibits the same person from being a member of the board of both a supplier and a TSO. 565 “The experience made in the first decade of liberalizing the EU energy markets made the Commission conclude that the incumbent’s position to use its dual control over the networks and the generation and supply business in a way affecting the internal market objectives must be countered by more radical structural separation.” Buschle, 2013, pp. 50–51. 566 European Commission, The Unbundling Regime, 2010, p. 7. 567 The transmission system owner has certain responsibilities such as granting and managing third-party access on a non-discriminatory basis to system users, collecting access charges, congestion charges and payments under the inter-TSO compensation mechanism, and maintaining and developing the network system. 568 According to the Article 3(2) EC Merger Regulation, control is constituted by “rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking”, in particular by: (a) ownership or the right to use all or part of the assets of an undertaking; (b) rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking. 569 The rights include, in particular: (a) the power to exercise voting rights; (b) the power to appoint members of the supervisory board, the administrative board or bodies legally representing the undertaking; or (c) the holding of a majority share. 570 Article 9(1)(b)(i) of Directive 2009/72/EC. 571 European Commission, The Unbundling Regime, 2010, p. 8. 572 E.g., the supervisory board or the administrative board. Part 4 Competition in the European Energy Markets 138 The advantages of ownership unbundling of transmission and distribution activities from production and supply activities are widely acknowledged.573 The Commission claims that ownership unbundling is the simplest and most effective way to achieve effective separation and align the interests of network companies with those of the “market”. A detailed analysis undertaken with respect to unbundling the energy sector concluded that ownership unbundling has a number of positive impacts on the market, in particular because it stimulates investment in interconnectors, reducing market concentration and bringing down prices.574 According to Kroes, there is a direct correlation between ownership unbundling and investments in networks. Available data relating to Member States indicates that ownership unbundling is conducive to investments in networks and that therefore it would remove the distortion of investment incentives within vertically integrated undertakings having no incentive to develop the network in the overall interest of the market thus facilitating new entry at the generation or supply levels.575 TSOs demonstrate a significant and constant increase in investment levels after ownership unbundling has taken place.576 573 OECD, 2006, p. 137: “Ownership separation of transmission from generation is, in principle, preferable. Introducing an independent systems operator while leaving transmission and generation in the ownership of the Verbundunternehmen would entail separation of transmission asset ownership from transmission asset management, which may result in inefficiencies.” European Commission, Energy Sector Inquiry, 2007, p. 12:“Economic evidence shows that ownership unbundling is the most effective means to ensure choice for energy users and encourage investment.” Kroes, 2007, p. 1388: “[…] ownership unbundling of transmission networks is the simplest, most effective and most stable solution to improve competition in European energy markets and that in order to be equally effective an ISO must be ‘deep’ in the sense that the system operator must be in full control not only of network operations but also of investments, and must be accompanied by detailed regulation and close regulatory oversight.” 574 European Commission, Accompanying the legislative package on the internal market for electricity and gas – Impact Assessment, 2007. 575 Ibid. 576 Kroes, 2007, p. 1417. § 7. Sector-Specific Rules for Energy Markets 139 Independent System Operator (ISO) The independent system operator (ISO) model577 is introduced as an alternative to ownership unbundling and is considered as the “the second-best solution”.578 Under this unbundling model, the ultimate owner of the network which still carries out production or supply activities will have to legally and functionally unbundle the part of the company which owns the network. In other words, the technical and commercial operation of the assets is put into an independent company that is designated by Member State.579 According to Article 13(1) of the Electricity Directive and Article 14(1) of the Gas Directive, in cases in which the transmission system is owned by a vertically integrated undertaking, Member States can determine an independent system operator upon the request of the transmission system owner. Solely the undertakings which are approved in the sense that they fulfil the conditions determined by the Electricity and Gas Directives can be appointed as independent system operators by Member States.580 The duties of an ISO correspond to the duties of a TSO. Within the scope of the Electricity and Gas Directives and the Electricity and Gas Regulations, the aforementioned entity should act in accordance with any duties applicable to TSO. The Electricity and Gas Directives stated clearly that “the independent system operator shall act as a transmission system operator”.581 The ISO’s duties can be stated as follows582: – granting and managing third-party access (including the collection of access charges and congestion rents); 2. 577 “ISO regime may be applicable to both the electricity and gas sectors. According to the explanatory memorandum fundamental conflict of interest between the supply and production activities on the one hand and the network operation and development on the other hand applies equally to both sectors. This has also been suggested by others and it has even been suggested that ownership unbundling may be even more effective in the gas sector where the concentration levels are currently greater.” Praduroux & Talus, 2008, p. 9. 578 Pielow & Ehlers, 2008, p. 5. 579 Kroes, 2007, p. 1426. 580 Article 13(3) of Directive 2009/72/EC and Article 14(3) of Directive 2009/73/EC. 581 Article 13(4) of Directive 2009/72/EC and Article 14(4) of Directive 2009/73/EC. 582 Ibid. Part 4 Competition in the European Energy Markets 140 – executing payments under the inter-transmission system operator compensation scheme; – operating, maintaining and developing the transmission system; – ensuring the long-term ability of the system to meet reasonable demand through investment planning. According to Article 14 of the Electricity Directive and Article 15 of the Gas Directive, if an ISO has been appointed, the owner of the network which is still active in supply or production will have to legally and functionally unbundle the part of its company which owns the network.583 Independent Transmission Operator (ITO) According to Article 9(8)(b) of the Electricity Directive and Gas Directive, Member States may appoint an independent transmission operator in cases in which a transmission system is owned by a vertically integrated company. With respect to the scope of this model, the supply company can have the ownership of the network and operate it. However, the network has to be administered by a subsidiary of the parent company which can make financial, technical and other kinds of decisions independently. Although the model allows the continuation of the vertically integrated structure, it puts forth strict rules in order to ensure the independence and autonomy as well as the administrative independence of the transmission firm.584 It can also be ascertained that the operating activity of the network is not unbundled from the supply activity structurally and that the ownership of the network is still held by the parent company, which distinguishes this model fundamentally from the concept of ISO.585 Although the ITO model has principles similar to those of legal and functional unbundling, the provisions are enhanced. The ITO model includes stricter provisions in order to increase the independence of the transmission operator in terms of management and personnel. As it is stated in Article 17(1) of the Electricity and Gas Direc- 3. 583 Kroes, 2007, p. 1417. 584 Cabau & Sandberg, 2016, p. 106. 585 Ibid. § 7. Sector-Specific Rules for Energy Markets 141 tives, the ITO must be equipped with all human, technical, physical and financial resources necessary for fulfilling its obligations under the Electricity and Gas Directives and carrying out the activity of electricity or gas transmission. Article 17(1)(a) of the Electricity and Gas Directives envisages that a multitude of assets necessary for electricity and gas transmission activities, including the transmission system, should be clustered under the ownership of the transmission operator. Collectively realising all corporate duties, all personnel necessary for electricity and gas transmission activities should be employed by the transmission operator.586 The condition of autonomy does not include activities that are not directly related to the electricity and gas transmission activity, such as cleaning or security.587 Another important condition of the ITO model of unbundling is the establishment of a supervisory body. As stated in Article 20 of the Electricity and Gas Directives, “the transmission system operator shall have a Supervisory Body which shall be in charge of taking decisions which may have a significant impact on the value of the assets of the shareholders within the transmission system operator, in particular decisions regarding the approval of the annual and longer-term financial plans, the level of indebtedness of the transmission system operator and the amount of dividends distributed to shareholders.” The duties of ITOs encompass588: – to ensure that the system is able to meet the reasonable demands in long-term with respect to the electricity transmission; – to ensure that the operation, management and development of transmission systems are done under the economic conditions of secure, reliable and efficient measures with due regard to the environment; – to manage electricity flows on the system, taking into account exchanges with other interconnected systems; – to ensure that adequate means are adopted with regards to service obligations; 586 Article 17(1)(b) of Directive 2009/72/EC and Directive 2009/73/EC. 587 European Commission, The Unbundling Regime, 2010, p. 15. 588 Article 12 of Directive 2009/72/EC and Article 13 of Directive 2009/73/EC; Article 17(2) of Directive 2009/72/EC and Directive 2009/73/EC. Part 4 Competition in the European Energy Markets 142 – to contribute to the security of supply through ensuring adequate transmission capacity and system reliability; – to collect all the transmission system-related charges; – to grant and manage third-party access on a non-discriminatory basis between system users or classes of system users; – to operate, maintain and develop a secure, efficient and economic transmission system; – to undertake investment planning, ensuring the long-term capability of the system to meet reasonable demand and to guarantee security of supply; – to provide any other system operator with which its system is interconnected with sufficient information to ensure the secure and efficient operation, coordinated development and interoperability of the interconnected systems; – to provide the system users with the information required by them for an efficient access to the system; and – to ensure non-discrimination between the system users. Unbundling in Distribution The regime for the unbundling of distribution system operators (DSOs) is determined by Article 26 of the Electricity and Gas Directives. In cases in which the DSO is part of a vertically integrated undertaking, the following unbundling regimes should be applied589: – accounting unbundling, – functional unbundling, and – legal unbundling. Accounting Unbundling With reference to the weakest form of separation, the accounting unbundling primarily aims at preventing distortion of competition through cross-subsidies between network system operations and supply operations. To this aim it requires vertically integrated undertakings to keep separate accounts for each of their activities as they would be required to B. 1. 589 European Commission, The Unbundling Regime, 2010, p. 23. § 7. Sector-Specific Rules for Energy Markets 143 do if the activities in question were carried out by separate undertakings.590 The main purpose of the accounting unbundling method is to prevent cross-subsidies, including cost and profit-loss transfers between network activities and activities open to competition, by making transparent the activities of vertically integrated companies.591 Accounting unbundling was the minimum requirement specified in Directive 96/92/EC. The main rules pertaining to accounting unbundling are laid out in Article 31 of the Electricity and Gas Directives. Accordingly, distinct balance sheets and income sheets should be prepared for network activities, and the accounting rules, asset and liabilities, income and expenditure, amortisation and profit for these activities should be stated clearly. Functional Unbundling Functional unbundling is relatively more intrusive than the accounting unbundling. It requires three levels of separation: management separation, independent decision-making powers and informational independence or confidentiality.592 First of all, the management personnel of the distribution system operator (DSO) must not participate in the corporate segments of the vertically integrated undertaking carrying out the day-to-day operation of the production, transmission, distribution or supply.593 In other words, someone who is a director of a DSO cannot be a director of a production, supply or transmission undertaking and vice versa. Under the functional unbundling model, the network unit must have the necessary human resources and the necessary financial and infrastructural assets required for operating independently from other market activities within the vertically integrated structure. Secondly, functional unbundling requires an independent decisionmaking power. The DSO must be able to independently take all decisions concerning the operation, maintenance and development of the network without involvement of other parts of the vertically integrated 2. 590 Malmendier & Schendel, 2006, p. 379. 591 European Commission, The Unbundling Regime, 2010, p. 28. 592 Gao, 2010, p. 111. 593 Article 26 of Directive 2009/72/EC and Directive 2009/73/EC. Part 4 Competition in the European Energy Markets 144 undertaking. The DSO must have all the necessary resources, including human, technical, financial and physical resources, in order to fulfil these tasks independently.594 Thirdly, the DSO is required to put a compliance programme in place which includes measures to ensure that discriminatory conduct is precluded595 and that the network activities as a whole, as well as individual employees and the management of the DSO, comply with the principle of non-discrimination.596 The rules on functional unbundling are further strengthened by requiring the DSO to preserve the confidentiality of commercially sensitive information obtained in the course of carrying out its activities.597 By limiting the information exchange and communication through the “Chinese Wall” created between network activities and commercial activities, it is possible to prevent production or supply undertakings from obtaining sensitive information and, hence, from discriminating against third parties.598 Legal Unbundling Directive 2003/54/EC and Directive 2003/55/EC went one step further than the first Electricity and Gas Directives and introduced the concept of legal unbundling which is a more stringent unbundling than the separation of accounts. According to Electricity and Gas Directives, “where the transmission system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision making from other activities not relating to transmission.”599 However, with respect to such an unbundling regime, it is not compulsory for vertically integrated undertakings to separate their ownership of assets in transmission systems.600 In other words, a legally separated network company must be established, but it may re- 3. 594 Article 26(2)(c) of Directive 2009/72/EC and Directive 2009/73/EC; European Commission, The Unbundling Regime, 2010, p. 24. 595 Article 26(2)(d) of Directive 2009/72/EC and Directive 2009/73/EC. 596 European Commission, The Unbundling Regime, 2010, p. 26. 597 Ibid., p. 27. 598 Ehlers, 2010, p. 20. 599 Article 10(1) of Directive 2003/54/EC and Article 9(1) Directive 2003/55/EC. 600 Ibid. § 7. Sector-Specific Rules for Energy Markets 145 main a subsidiary of a vertically integrated energy company. In this case, however, the internal separation into departments is not considered sufficient, and it is required that network companies should be incorporated as legally independent subsidiaries. Nevertheless, the network company can be a subsidiary of the parent company which has energy production and supply activities. The purpose of such an unbundling is to prevent collaboration between unbundled departments and, hence, internal cross-subsidisation.601 However, combining regulated and unregulated companies under the same ownership constitutes a risk factor. According to Thomas, there would still be an incentive for the parent company of the grid owning company to treat its subsidiary active in power generation or retail better than companies with which it has no ownership connection.602 Third-Party Access Third-party access (TPA) plays a key role as a regulatory tool in the liberalisation of European energy markets and the creation of an open and non-discriminatory energy infrastructure.603 For competition to function in energy markets, network access must be non-discriminatory, transparent and fairly priced.604 According to the Commission, transmission and distribution segments have always constituted natural monopolies. Despite unbundling provisions, most of the time new entrants lack effective access to networks. Network owners or operators have mostly strong relations to energy producers and suppliers. They usually avoid granting access to third parties and favour their own affiliates.605 Consequently, third party energy producers cannot reach their final customers and cannot trade, as there is no alternative to the existing energy network.606 Although undertakings are allowed to construct a second transmission or distri- II. 601 Ehlers, 2010, p. 20. 602 Thomas, 2007, p. 4. 603 Palasthy, 2002, p. 1; Diathesopoulos, 2010, p. 5. 604 Recital 6 of Directive 2003/54/EC. 605 European Commission, Energy Sector Inquiry, 2007, p. 7. 606 Diathesopoulos, 2010, p. 5. Part 4 Competition in the European Energy Markets 146 bution line, this is not considered economically viable due to high investment costs.607 In transmission and distribution sectors, market competitiveness depends substantially on the effective access of new entrants to the transmission and distribution infrastructures and, in the case of gas, to storage facilities.608 In other words, one of the conditions of enabling an effective competitive environment in these sectors is requiring that the operators of transmission and distribution networks open their facilities to all electricity and gas suppliers.609 Such a condition is defined as the “Third-Party Access Principle”. The concept broadly refers to the possibility for electricity suppliers and/or customers to make use of electricity grids they do not own or control in order to sell or buy electricity.610 The rationale behind TPA is to allow producers, eligible customers, local distribution companies and other suppliers to have the right to be offered access to the gas or electricity networks by transmission and distribution undertakings.611 This access is important to encourage competition on both the consumers’ and the generators’ side of electricity and gas markets. Although this requirement can be introduced by competition law, ex post rules of competition law have been deemed insufficient in practice.612 For this reason, the rules and the conditions of access regime are determined by sector-specific regulations.613 TPA regarding electricity and gas markets is developed through sector-specific regulations at three different levels. Firstly, the main framework of TPA set out in the Electricity and Gas Directives includes the basic rules and principles. Secondly, the content of these rules is laid down in detail in Regulation 714/2009 and Regulation 715/2009. Thirdly, the most detailed regulations of TPA are network 607 Gräper et al., 2016, p. 27. 608 Vijver, 2012, p. 335. 609 “For competition to function, network access must be non-discriminatory, transparent and fairly priced.” Recital (6) of Directive 2003/54/EC. 610 Palasthy, 2002, p. 1. 611 Salter, 1994, p. 86. 612 Vijver, 2012, p. 335. 613 European Commission, Questions and Answers on the third legislative package for an internal EU gas and electricity market, 2011. § 7. Sector-Specific Rules for Energy Markets 147 codes and guidelines which are prepared based on the aforementioned Regulations.614 Types of Third-Party Access The first Electricity and Gas Directives distinguished, inter alia, between the regulated access and the negotiated access.615 Member States were able to choose either or both. However, the possibility to choose between negotiated access and regulated access was dropped in the second and third Directives. Regulated access is considered as a minimum TPA requirement for transmission and distribution networks.616 Nevertheless, Member States may still choose between a negotiated or regulated system of access to storage and line pack facilities. In each case attention must be given to ensure that procedures operate in accordance with objective, transparent and non-discriminatory criteria. Regulated Third-Party Access The Electricity and Gas Directives envisage the implementation of regulated third-party access to all transmission and distribution networks including cross-border infrastructure and LNG facilities617, which indicates that Member States must regulate and publish access tariffs. According to Article 32 of the Electricity Directive, “Member States shall ensure the implementation of a system of third-party access to the transmission and distribution systems based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between system users.” The regulated access enables the A. 1. 614 Talus, 2013, p. 73. 615 “As far as electricity is concerned, the first (1996) Directive offered a choice between three options. The first of these was the single-buyer model (included on French insistence), which was quickly recognised as not workable, and not adopted even in France. The second was the regulated access model. The third was negotiated access where, supposedly, the terms are freely negotiated but some pressure is exerted to push the recalcitrant network operator in the right direction if need be. As per Article 17(3) of the first electricity Directive, negotiated access did not require ‘tariffs’, but ‘indicative prices’. However, it is not practical to consider that any transmission might be based on separate detailed negotiations.” Talus, 2013, p. 71. 616 Gräper et al., 2016, p. 27. 617 Ibid., p. 43. Part 4 Competition in the European Energy Markets 148 third party to use the network based on specified provisions and conditions. The aforementioned proposition is indicative of the fact that access terms and conditions should be examined ex ante by the national regulatory authorities.618 The Electricity and Gas Directives require all tariffs concerning access to electricity and gas transmission, distribution systems and LNG facilities to be published. These tariffs should be easily accessible, transparent and applicable to everyone without, once published, renegotiating at the individual level.619 There are various applicable criteria in terms of the tariffs regarding transmission and distribution systems and LNG facilities.620 Transmission and distribution tariffs must be non-discriminatory, cost-reflective621, long-term and marginal. They should also avoid mingling network costs with costs associated with power generation. Demand-side management measures should be taken into account while determining these tariffs.622 Together with this, another criteria is that an “incentive, over both the short and long term, to increase efficiencies, foster market integration and security of supply and support the related research activities” is given to transmission and distribution system operators.623 Within the network industries, inasmuch as the goods are transported through networks, access to networks is required and allocation of limited capacity in the network is vital in order to be competitive in these markets. The purpose of the regulated access is to allocate capacity without any form of discrimination and to enable the access of all 618 Börner, 2002, p. 28. 619 Gräper et al., 2016, p. 44. 620 Johnston & Block, 2012, p. 76. 621 “Those tariffs or methodologies shall allow the necessary investments in the networks to be carried out in a manner allowing those investments to ensure the viability of the networks.” Article 37 of Directive 2009/72/EC and Article 41 of the 2009/73/EC. And Article 13(1) of Regulation 715/2009 states: “Tariffs, or the methodologies […] take into account the need for system integrity and its improvement and reflect the actual costs incurred, insofar as such costs correspond to those of an efficient and structurally comparable network operator and are transparent, whilst including an appropriate return on investments, and, where appropriate, taking account of the benchmarking of tariffs by the regulatory authorities. Tariffs, or the methodologies used to calculate them, shall be applied in a non-discriminatory manner.” 622 Recital 36 of Directive 2009/72/EC and Recital 32 of 2009/73/EC. 623 Article 37(8) of Directive 2009/72/EC and Article 41(8) of 2009/73/EC. § 7. Sector-Specific Rules for Energy Markets 149 concerned parties to key infrastructures for participation in the electricity and gas markets.624 Access to Upstream Pipeline Networks The access to upstream pipeline networks is regulated under Article 34 of the Gas Directive. Regardless of the location of the natural gas operators and customers meeting the required conditions, Member States are required to undertake the necessary measures with the aim of ensuring the access of the customers to the pipeline networks related to the natural gas production, including facilities providing secondary technical services for such access but, however, excluding the parts of such networks and facilities used for local gas production operations. The measures should be reported in accordance with the requirements of the Commission.625 The Directive requires Member States to put dispute-settlement arrangements in place and to establish an authority independent of the parties which has access to all relevant information in order to enable disputes relating to access to upstream pipeline networks to be settled expeditiously.626 In cross-border disputes, the dispute resolution regulation of Member States having jurisdiction over the pipeline network related to the gas production to which access has been refused is valid. However, if in cases of cross-border disputes the related network includes more than one Member State, the respective Member States must consult each other to ensure consistent implementation of the provisions of the Directive.627 Considering the differences between the upstream and downstream sectors, it is reasonable to introduce such an exceptional regulation in terms of upstream pipeline networks. 2. 624 Gräper et al., 2016, p. 55. 625 Article 34(1) of Directive 2009/73/EC. 626 Article 34(3) of Directive 2009/73/EC. 627 Article 34(4) of Directive 2009/73/EC. Part 4 Competition in the European Energy Markets 150 Negotiated Third-Party Access According to this method, the third party can enter into a contract with the network owner, and the provisions and terms are determined by them. However, they need to make a distinct contract by bargaining with the transmission and distribution system operators for access to transmission and distribution networks. In this case, the competition authority will check ex post whether the network owner has abused the powers arising from its control of the near monopoly.628 Article 33 of the Gas Directive, which has lex specialis status, regulates (alongside Article 32) access to natural gas storages. Article 33(3) states: “In the case of negotiated access, Member States or, where Member States have so provided, the regulatory authorities shall take the necessary measures for natural gas undertakings and eligible customers either inside or outside the territory covered by the interconnected system to be able to negotiate access to storage facilities and line pack, when technically and/or economically necessary for providing efficient access to the system, as well as for the organisation of access to other ancillary services. The parties shall be obliged to negotiate access to storage, line pack and other ancillary services in good faith.” In terms of the electricity markets, all transmission and distribution systems are subject to regulated third-party access. However, with respect to the gas market, the option of selecting between negotiated or regulated third-party access regarding gas storage and ancillary services is given to Member States.629 According to the provision, Member States may, if they wish, select negotiated third-party access regarding gas storage and ancillary services. The reason for making a distinction in terms of access to gas storages is that gas storages do not necessarily constitute a natural monopoly.630 Refusal of Access The transmission and distribution operators are allowed to refuse access to networks in case necessary capacity is lacking. The access can 3. B. 628 Börner, 2002, p. 28. 629 Article 33 of Directive 2009/73/EC. 630 Gräper et al., 2016, p. 59. § 7. Sector-Specific Rules for Energy Markets 151 be refused if duly substantiated justifications are provided.631 Under the Electricity and Gas Directives, there are several situations when refusal of network access is possible632: – Lack of capacity: A TSO may refuse access where it lacks the necessary network capacity. – Public service obligations: If granting access would prevent undertakings from carrying out public service obligations633 which are assigned to them, the access may be refused. – Sudden crisis: A Member State may temporarily take the necessary safeguard measures in the event of a sudden crisis in the energy markets and where the physical safety or security of persons, apparatus or installations or system integrity is threatened.634 – Take-or-pay contracts: Natural gas undertakings may refuse access to the system on the basis of serious economic and financial difficulties with take-or-pay contracts. With respect to storage facilities, refusal of access can be justified on the grounds of lack of capacity if the following two conditions are met635: – Refusal should be objective and transparent. In other words, it must be conclusively proven by the storage operator that no capacity is available, by regularly disclosing the data on available capacity over a certain period of time, including historical data and distinguishing between firm and interruptible storage capacity. The data provided by the storage operator should demonstrate that the entire working capacity of the storage facility concerned is either contractually booked or physically used, i.e., no availability of firm or interruptible capacity. 631 Article 32 of Directive 2009/72/EC and Article 35 of Directive 2009/73/EC. 632 Dziadykiewicz, 2007, p. 119. 633 Such public service obligations may relate to security, including security of supply, regularity, quality and price of supplies, and to environmental protection, including energy efficiency, energy from renewable sources and climate protection. Article 3(2) of Directive 2009/72/EC and Article 3(2) of Directive 2009/73/EC. 634 Article 42 of Directive 2009/72/EC and Article 46 of Directive 2009/73/EC. 635 European Commission, Interpretative Note on Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas, 2010, p. 14. Part 4 Competition in the European Energy Markets 152 – Refusal should be non-discriminatory. The outcome of an access request to storage facility submitted to a storage system operator or a combined operator running a storage facility should be the same (i.e., refusal on the grounds of lack of capacity), no matter who submitted the request. Moreover, all concerned/interested parties must be informed in a non-discriminatory manner if there is a change in terms of available capacities. Thus, all interested/concerned parties should be able to submit their request under a non-discriminatory capacity allocation mechanism. Natural gas undertakings could refuse access to the system under the following circumstances636: – on the basis of lack of capacity; – if the access to the system would prevent them from carrying out their public service obligations; – on the basis of serious economic and financial difficulties with take-or-pay contracts. Natural gas undertakings refusing access to their system must give duly substantiated reasons. According to the Directive, in the event that access to the system is refused on the grounds of lack of capacity or a lack of connection, Member States may take measures to ensure that the refusing undertaking makes the necessary enhancements as far as it is economically viable to do so or if a potential customer is willing to pay for them.637 Refusal of access does not constitute an abuse per se. In the Bronner decision 638, the CJ analysed the case as a refusal of supply abuse. The CJ determined three conditions for considering a refusal of access an abuse within the scope of Article 102 TFEU 639: – The refusal of the service is likely to eliminate all competition in the relevant market on behalf of the person requesting the service. – Such refusal is incapable of being objectively justified. 636 Article 35(1) of Directive 2009/73/EC. 637 Article 35(2) of Directive 2009/73/EC. 638 Case C-7/97, Oscar Bronner v Mediaprint Re, [1998] ECR I-7791. 639 Kotlowski, 2007, p. 106. § 7. Sector-Specific Rules for Energy Markets 153 – The services as such are indispensable to carrying on the requesting party’s business, inasmuch as there is no actual or potential substitute in existence for that service. The CJ expressed that an undertaking in a dominant position is not per se obliged to grant access to its facilities, since this would refrain undertakings from investing in new infrastructures.640 Thus, although these criteria can be useful when determining if a conduct infringes Article 102 TFEU, each case must be viewed separately. Exemption of Third-Party Access Non-discriminatory access to energy systems (networks, LNG and storage facilities) is a prerequisite for energy market liberalisation and is necessary for enabling new entries into the market.641 As mentioned above, electricity and gas transmission system operators as well as operators of storage or LNG facilities are required to grant other market players non-discriminatory access to their infrastructure. The same service must be offered to different users under identical contractual conditions. However, strict application of TPA has several disadvantages. Constructing a new electricity or gas network requires particularly high costs, and strict access provisions may decrease the incentive to finance new infrastructure projects as it reduces investor certainty as to its use.642 The nature of some types of infrastructure, such as sub-sea interconnectors, gas storages and LNG facilities, are very expensive and risky.643 In this case, market players might be faced with two issues: risk of underinvestment and risk of foreclosure. A balance must therefore be struck between TPA and the need for investments.644 The Electricity and Gas Directives allow national regulatory authorities (NRA) (with the permission of the Commission) to exempt C. 640 Fredriksson, 2001, p. 44. 641 Vedder et al., 2016, p. 287. 642 Vijver, 2012, p. 334. 643 Vedder et al., 2016, p. 289. 644 Vijver, 2012, p. 335. Part 4 Competition in the European Energy Markets 154 new infrastructure from the TPA principle.645 These exemptions are linked to strict conditions for both electricity and gas investments. However, it should be stated that the realisation of these conditions does not automatically mean that this exemption will be authorised.646 In order to obtain the exemption, the following conditions must be met647: – The investment must enhance competition in gas or electricity supply. – The level of risk attached to the investment is such that the investment would not take place unless an exemption was granted. – The infrastructure must be owned by a natural or legal person who is separate, at least in terms of its legal form, from the system operators. – Charges must be levied on users of the infrastructure. – The exemption must not be to the detriment of competition, the effective functioning of the internal market in electricity and gas or the efficient functioning of the regulated system to which the interconnector is linked. The exemption request must be examined by the NRA of the related Member State, and, if conceded, the Commission will review the exemption decision of the NRA. The Commission is responsible for verifying that the conditions are met. If it comes to the conclusion that one or more conditions are not met, it may ask the national authorities to amend or withdraw their decisions. 645 In 2004, the Commission published an Interpretation Note regarding exemption from the provisions of the third-party access regime. This document clearly stated that the exemptions constitute exceptions to general rules, i.e., on a case-by-case basis they may be authorised. 646 Interpretation Note of DG Energy & Transport on Directives 2003/54–55 and Regulation 1228/03 in the electricity and gas internal market: Exemptions from certain provision of the third-party access regime, p. 4. 647 Article 17 of Regulation 714/2009 and Article 36 of Directive 2009/73/EC. § 7. Sector-Specific Rules for Energy Markets 155 An Overview of the EU Competition Rules European Anti-Cartel Rules Article 101 TFEU Article 101 TFEU has a bifurcated structure. While Article 101(1)TFEU lays down the general prohibition rule, Article 101(3) TFEU sets out an exemption. Article 101(1) TFEU constitutes a general prohibition against agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and have as their object or effect the prevention, restriction or distortion of competition within the internal market. According to Ritter & Braun, the main purpose of this rule is to guarantee that each undertaking independently can determine its business policy and market conduct within the EU.648 As a principle, Article 101(1) TFEU can be applied to: – Horizontal relations: It refers to the concerted practices or agreements between two or more undertakings operating at the same level in a production or distribution chain. – Vertical relations: It refers to the concerted practices or agreements between two or more undertakings operating at different levels in a production or distribution chain. The CJ demands evidence of cooperation and coordination between undertakings which may cause restriction or distortion of competition in order to implement Article 101(1) TFEU. In general, it can be said that three main elements must exist together for the implementation of Article 101(1) TFEU: the presence of an agreement or decisions by associations of undertakings and concerted practices; the distortion of conditions of competition; the possibility that trade between Member States may be affected because of these two factors. § 8. I. A. 648 Ritter & Braun, 2004, p. 95. Part 4 Competition in the European Energy Markets 156 There would be no infringement of Article 101(1) TFEU unless the agreement affects649 trade650 between Member States. In other words, the agreement must be capable of affecting trade between Member States.651 Moreover, agreements and other arrangements are not prohibited unless they have as their object or effect the prevention, restriction or distortion of competition. Article 101 TFEU contains a non-exhaustive list of arrangements that may prevent, restrict or distort competition, which includes price-fixing arrangements, market share arrangements, export bans and resale price maintenance. The scope of the aforementioned list is extended regularly through judicial decisions. Article 101(3) TFEU includes “an exemption basis” for agreements, decisions and concerted practices which contribute to improving the production or distribution of goods or to promoting technical or economic progress while allowing consumers a fair share of the resulting benefit. The prohibition specified by Article 101(1) TFEU may be declared inapplicable when the four criteria set out in Article 101(3) TFEU are fulfilled.652 The exemption given in Article 101(3) TFEU is, however, only applicable to the activities specified in Article 101 TFEU. In other words, since an agreement that may be granted an exemption within the scope of Article 101(3) TFEU will only be considered exempt 649 “The function of the notion ‘may affect’ is to define the nature of the required impact on trade between Member States. According to the standard test developed by the Court of Justice, the notion ‘may affect’ implies that it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or fact that the agreement or practice may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.” European Commission, Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty, 2004, para. 23. 650 “The concept of ‘trade’ is not limited to traditional exchanges of goods and services across borders. It is a wider concept, covering all cross-border economic activity including establishment. This interpretation is consistent with the fundamental objective of the Treaty to promote free movement of goods, services, persons and capital.” Ibid., para. 19. 651 Ibid., para. 14. The CJ has adopted a broad interpretation of the above stated requirement. In the Béguelin case, the CJ stated that in order to be subsumed within the prohibition imposed by Article 101 TFEU the agreement must affect trade between Member States and the free play of competition to an appreciable extent. Case C-22/71, Béguelin Import v G.L. Import Export, [1971] ECR 949, para. 16. See also: Case 56/65, Société Technique Minière v Maschinenbau Ulm Gmbh, [1966] ECR 235. 652 Jones & Sufrin, 2016, p. 114. § 8. An Overview of the EU Competition Rules 157 from Article 101 TFEU, it may nonetheless infringe upon Article 102 TFEU or other competition rules. According to Article 101(3) TFEU, a practice which falls within the scope of Article 101(1) TFEU can be exempted from the prohibition if it fulfils two positive and two negative cumulative conditions: – The agreement (decision and concerted practice) must contribute to improving the production or distribution of goods or to promoting technical or economic progress. – Consumers must receive a fair share of the resulting benefits. – Restrictions must be indispensable to the attainment of these objectives. – The agreements must not afford undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. These conditions are not an alternative for one another, and they should all be met in each case. According to settled case law, the four conditions of Article 101(3) TFEU are cumulative, i.e., they must all be fulfilled for the exception to the rule becoming applicable.653 If they are not, the application of the exception to the rule as stated in Article 101(3) TFEU must be refused.654 Article 102 TFEU Article 102 constitutes another important antitrust rule and prohibits any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it which may affect trade between Member States. Article 102 TFEU only covers the existing abuse of a dominant position. Viewed from this point, Article 102 TFEU basically plays a controlling role for monitoring the behaviours of rivals in the market in order to enable the effective functioning of competition. However, the main goal of this Article is to protect consumers and defend B. 653 See, e.g., Case C-238/05, Asnef-Equifax, [2006] ECR I-11125, para. 65; Case T-185/00, Métropole télévision SA, [2002] ECR II-3805, para. 86; Case T-17/93, Matra, [1994] ECR II-595, para. 85; Joined Cases 43/82 and 63/82, VBVB and VBBB, [1984] ECR 19, para. 61. 654 European Commission, Guidelines on the application of Article 81(3) of the Treaty, 2004, para. 42. Part 4 Competition in the European Energy Markets 158 their interests from the possible results of abuse of a dominant position by undertakings. In order for Article 102 TFEU to be implemented in any case, the following four main elements must be fulfilled together: – a certain number of rivals; – a dominant position; – an abuse of a dominant position; – trade between Member States is negatively affected by this situation. Article 102 TFEU requires the pursuance of two steps. The first step is ascertaining whether the dominant position655 exists. In order to identify the dominant position of an undertaking, the Commission and the CJ have established some criteria in their decisions. The most important indicator is the market share. According to the Commission, the higher the market share, and the longer the period of time over which it is held, the more likely it is to be a preliminary indication of dominance.656 The second step is to identify whether the abuse657 of a dominant position by 655 According to settled case law, dominance is a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and, ultimately, of the consumers. European Commission, DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses, 2005. Case 6/72, Continental Can, [1973] ECR 215; C-27/76, United Brands v Commission, [1978] ECR 207; Case 85/76, Hoffmann-La Roche v Commission, [1979] ECR 461. 656 “It is very likely that very high markets shares, which have been held for some time, indicate a dominant position. This would be the case where an undertaking holds 50 % or more of the market, provided that rivals hold a much smaller share of the market. In the case of lower market shares, dominance is more likely to be found in the market share range of 40 % to 50 % than below 40 %, although also undertakings with market shares below 40 % could be considered to be in a dominant position. However, undertakings with market shares of no more than 25 to %35 are not likely to enjoy a (single) dominant position on the market concerned.” European Commission, DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses, 2005. 657 The CJ laid down the definition of abuse as following: “The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and § 8. An Overview of the EU Competition Rules 159 an undertaking or undertakings occurred or not.658 Holding a dominant position is not indicative of the fact that there is an infringement of Article 102 TFEU. The undertaking must abuse its dominant position. Article 102 does not define the concept of abuse, but it provides four main examples. However, the CJ argues that these examples are not exhaustive and there may be other types of abuses.659 Generally, the abuse of a dominant position can be divided in three groups660: – Exploitative abuse: In this kind of abuse, the undertaking in a dominant position uses its market power advantage to obtain profit from consumers in a way that an undertaking not in the dominant position cannot obtain, or takes advantage of consumers in other ways. Product-binding agreements through excessive pricing practices are included in this scope. – Exclusionary abuse: It is the abuse situation in which market power is used to damage the rival through uncompetitive behaviours such as refusal of deal and predatory pricing.661 – Structural abuse: This refers to the situation of influencing competition and eliminating rivals through company mergers. which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.” Case 85/76, Hoffmann-La Roche v Commission, [1979] ECR 461, para. 91. 658 Bishop & Walker, 2010, p. 102. 659 “It is in the light of these considerations that the condition imposed by Article 86 is to be interpreted whereby in order to come within the prohibition a dominant position must have been abused. The provision states a certain number of abusive practices which it prohibits. The list merely gives examples, not an exhaustive enumeration of the sort of abuses of a dominant position prohibited by the Treaty. As may further be seen from letters (c) and (d) of Article 86(2), the provision is not only aimed at practices which may cause damage to consumers directly, but also at those which are detrimental to them through their impact on an effective competition structure, such as is mentioned in Article 3(f) of the Treaty. Abuse may therefore occur if an undertaking in a dominant position strengthens such position in such a way that the degree of dominance reached substantially fetters competition, i.e. that only undertakings remain in the market whose behaviour depends on the dominant one.” Case 6/72, Continental Can, [1973] ECR 215. See: Case 85/76, Hoffmann-La Roche v Commission, [1979] ECR 461, para. 128–136. 660 Hofmann, 2013, p. 176. 661 See: Case 6/72, Continental Can, [1973] ECR 215, para. 26. Part 4 Competition in the European Energy Markets 160 State Aid Rules The basis of the EU’s state aid policy is set out in Articles 107–109 TFEU. Article 107 ensures that aid granted by a Member State does not distort competition and does not affect trade within the EU. Article 108 deals with the procedural aspects of the state aid policy of the EU. Article 109 empowers the Council to make any appropriate regulations for the application of Articles 107 and 108. Article 107 TFEU consists of three paragraphs. While the first paragraph provides the general prohibition rule, the second and third paragraphs specify exemptions in the scope of basic bans and define the aid compatible with the internal market. Article 107(1) prohibits any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods insofar as it affects trade between Member States and deems such an aid to be incompatible with the internal market. In order to apply Article 107(1), various criteria must be met. Although there is not a fully coherent approach in the CJ precedent decisions regarding how to apply these criteria, the CJ always uses the following four criteria662: – an intervention through state or state resources; – the possibility of this intervention to affect the trade between Member States; – an advantage for the recipient; – distortion of competition. Article 107(2) provides three state aid categories which are compatible with the internal market and not forbidden: – aid having a social character and granted to individual consumers without discrimination related to the origin of the products concerned; – aid granted to compensate for the damage caused by natural disaster or other extraordinary events; II. 662 Quigley, 2015, p. 4. § 8. An Overview of the EU Competition Rules 161 – aid for empowering the economy in some regions after the reunification of Germany. This means that if a state aid measure falls under one of these types, the Commission will have to approve the measure. Article 107(3) covers state aid that may be deemed compatible with the internal market and hence may be permitted by the Commission. These are: – aid to promote the economic development of poor areas in the EU; – aid to facilitate the development of certain economic activities or of certain economic areas; – aid to promote the execution of an important project of common European interest; – aid to remedy a serious disturbance in the economy of a Member State; – aid to promote culture and heritage conservation. The Council may add other categories of aid which can be considered compatible. As it is clear, not all state aid is forbidden; only the aid which is incompatible with the internal market is forbidden. On the one hand, the Treaty bans state aid which affects trade between Member States and distorts competition; on the other hand, it permits state aid granted for realising common interests.663 According to Article 108 TFEU, the Commission must be notified regarding any plans to grant new aid and the aid should not be put into effect without the Commission’s authorization.664 As per Article 108(2), if the Commission concludes that aid granted by a state or through state resources is not compatible with the internal market, or that such aid is being misused, it can decide that the aid should be abolished or altered by the state concerned within a period of time to be determined by the Commission. Article 108(3) establishes the stand-still clause regarding the issues of state aid. Pursuant to this provision, Member States should not grant any state aid without the approval of the Commission. 663 Buts et al., 2011, p. 400. 664 Recital 5 of Regulation 2015/1589. Part 4 Competition in the European Energy Markets 162 Although it is not specified in the Treaty, there is a De Minimis Regulation665 designed especially for the implementation of Articles 107 and 108 TFEU which envisage another “exceptional condition” similar to the implementation of the first paragraph of Article 101 TFEU. The second paragraph of Article 3 of this Regulation states that no notification is needed to be declared to the Commission for aids below the 200’000 Euro threshold. These exemptions justify the Commission giving permission to planned state aids in accordance with Article 108 TFEU. According to this article, Member States should inform the Commission before executing any programme. Moreover, this article grants the power of decision to the Commission to determine whether the suggested aid measure is in the scope of the exemption or should be abolished or modified by the Member State.666 The decision of whether a state aid measure is compatible with the common market can be given in different ways: – in the case where the aid meets the conditions within the Block Exemption Regulations667 adopted by the Commission (these regulations can be executed directly by the national courts); – following the proper procedure in the case where the aid is granted when the Commission decides on the compliance of an individual project or it approves a plan; – in the case where compliance is declared by the Council.668 In order to exercise its authority, the Commission has developed special criteria depending on the size, location or sector of the company and the purpose of the aid. The Commission sets out the criteria it uses for deciding on whether a measure is in the scope of the exemption in order to ensure transparency, predictability and legal precision.669 665 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid, OJ L 352, 24.12.2013, pp. 1–8. 666 European Commission, Vademecum Community Rules on State Aid, p. 4. 667 Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, OJ L 102, 23.4.2010, pp. 1–7. 668 Faull & Nikpay, 2014, p. 1720. 669 European Commission, Vademecum Community Rules on State Aid, p. 4. § 8. An Overview of the EU Competition Rules 163 Merger Regulation The Merger Regulation670 is aimed at ensuring that mergers do not cause too much market concentration, which may lead to abusive behaviour. The Regulation provides a mechanism for the control of mergers and acquisitions at the European level. The purpose of the Merger Regulation is to enable competition authorities to regulate changes in the market structure by deciding whether two or more undertakings may merge, combine or consolidate their businesses into one.671 The Commission has almost exclusive jurisdiction to review concentrations having a Community dimension. However, Member State competition authorities are free to exercise their jurisdiction over concentrations which fall below the threshold determined in the Merger Regulation.672 In other words, Member States cannot apply their national legislations on competition to any concentration that has a Community dimension.673 In this context, a “concentration” shall be deemed to arise where a change of control on a lasting basis result from674: – the merger of two or more previously independent undertakings675 (full-blown mergers); – the acquisition of control: one or more persons already controlling at least one undertaking, or one or more undertakings acquire direct or indirect control of the whole or parts of one or more other III. 670 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24, 29.1.2004, pp. 1–22. 671 Jones & Sufrin, 2016, p. 1085. 672 The division of competence between the Commission and the NCAs is based on the application of the turnover thresholds set out in Article 1 and includes three corrective mechanisms. The first corrective mechanism is the so-called “two-thirds rule”. The objective of this rule is to exclude from the Commission’s jurisdiction certain cases which contain a clear national nexus to one Member State. European Commission, Report on the functioning of Regulation No 139/2004, 2009, para. 8. 673 Article 22(3) of Regulation 139/2004. 674 Article 3 of Regulation 139/2004. See also: Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations, 2008/C 95/01. 675 Ibid. Part 4 Competition in the European Energy Markets 164 undertakings whether by purchase of securities or assets, by contract or by any other means Moreover, the creation of a joint venture, which functions as an autonomous economic entity on a lasting basis, would constitute a concentration (joint ventures that have all the functions of independent undertakings and are established on a permanent basis).676 All mergers having a community dimension677 are subject to a merger control procedure.678 According to Article 1, a concentration has a Community dimension where: – the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5000 million; and – the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million, unless each of the undertakings concerned achieves more than twothirds of its aggregate Community-wide turnover within one and the same Member State.679 The rationale behind the concept of EU dimension is to be able to apply the Merger Control Regulation to significant structural changes the impact of which on the market goes beyond the national borders of any one Member State.680 Pursuant to the Regulation, the Commission must be notified of any merger with an EU dimension prior to its implementation. The Commission examines whether the merger subject to the review is compatible with the common market and issues a ban when the merger harms the effective competition environment.681 676 Article 3(4) of Regulation 139/2004. 677 “The scope of application of this Regulation should be defined according to the geographical area of activity of the undertakings concerned and be limited by quantitative thresholds in order to cover those concentrations which have a Community dimension.” Recital 9 of the Regulation 139/2004. 678 However, the European Commission envisages a simplified procedure regarding some limitations to certain mergers which are required and defined directly for mergers. For more information, see: Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No 139/2004, OJ C 366, 14.12.2013, pp. 5–9. 679 ICN, 2012, p. 34. 680 Recital 8 of Regulation 139/2004. 681 Goyder, Goyder & Albors-Llorens, 2009, p. 391. § 8. An Overview of the EU Competition Rules 165 There is a two-stage investigation mechanism regarding the merger control procedure. During the first stage, the Commission examines the notified concentration and takes one of the following decisions: – The concentration does not fall within the scope of the Merger Regulation. – The concentration falls within the scope of the Merger Regulation but does not raise serious doubts as to its compatibility with the common market. – The concentration falls within the scope of the Merger Regulation and there are doubts as to whether it is compatible with the common market. As regards the first stage, the Commission has to take a decision within 25 working days following the receipt of a complete notification. It may be extended to 35 working days. Under this stage, the “obligatory suspension principle” must be applied and, hence, the notified concentrations that have a Community dimension are suspended until they have been declared compatible with the common market pursuant to a Commission decision. Within the framework of the second stage, the Commission takes one of the following decisions: – The concentration is compatible with the common market.682 – The concentration, following modifications, is compatible with the common market. – The concentration is not compatible with the common market. This decision is made according to criteria measuring the legality of the concentration. The second stage must be completed in 90 working days. The period may be increased to 105 working days where the undertakings concerned 682 The decisions of the Commission made to identify whether the concentrations are compatible with the common market should include ancillary restraints (restraints such as competition-restricting obligations necessary for executing the mergers or directly related to mergers, license agreements, supply and purchase obligations) without the need for the Commission to examine these restraints oneby-one. Commission Notice on restrictions directly related and necessary to concentrations, published in the OJ C 56, 05.03.2005, pp. 24–31 and the section on “Important Notices Concerning Mergers” of this Guide. Part 4 Competition in the European Energy Markets 166 offer commitments with a view to rendering the concentration compatible with the common market.683 If the Commission finds that a concentration: – has already been implemented and that concentration has been declared incompatible with the common market, or – has been implemented in contravention of a modification, it may require the undertakings concerned to dissolve the concentration and order any other appropriate measure to ensure that the undertakings concerned dissolve the concentration or take other restorative measures as required in its decision.684 Furthermore, the Commission may take interim measures appropriate to restore or maintain conditions of effective competition where a concentration: – has been implemented in contravention of Article 7 and a decision as to the compatibility of the concentration with the common market has not yet been taken; – has been implemented in contravention of a condition attached to a decision under Article 6(1)(b) or Paragraph 2 of this Article; – has already been implemented and is declared incompatible with the common market.685 Decisional Practice (Jurisprudence) in Energy Markets Article 101 Joint Selling: GFU Subject Matter The case686 is related to the joint gas sales in Norway through a single seller, the so-called GFU (Gas Negotiation Committee). The Norwegian government established the GFU in 1987. The Committee consisted of § 9. I. A. 1. 683 Article 10 of Regulation 139/2004. 684 Article 8(4) of Regulation 139/2004. 685 Article 8(5) of Regulation 139/2004. 686 Case COMP/36.072, GFU – Norwegian Gas Negotiation Committee, 2001. § 9. Decisional Practice (Jurisprudence) in Energy Markets 167 Norway’s largest gas producers, Statoil and Norsk Hydro. The principal task of the GFU was to negotiate all supply agreements on behalf of the gas producers in Norway with foreign buyers.687 The GFU had power to set prices, volumes and other trading terms on behalf of 30 Norwegian gas producers. Between late 1980s and 2001, Norwegian gas was sold after the GFU had agreed on all sales conditions with the buyers. GFU engaged in longterm agreements on behalf of Norwegian gas suppliers and European gas operators, and it negotiated all the terms of the sale, including the price on a field-neutral basis. In other words, during the negotiations neither the sellers nor the supplying gas field were known.688 This joint selling scheme enabled fixing the amount and price of the natural gas exported from Norway to the EU. As a result, the European gas market suffered from significant rigidity and liquidity scarcity. 689 The Commission had been investigating the case since 1996 and had warned Norwegian gas suppliers that joint gas sales through the GFU constituted a breach of the EU competition rules since it fixed the price and the quantities sold.690 Preliminary Assessment and Decision In 2001, based on Article 101 TFEU, the Commission initiated formal proceedings against around 30 Norwegian gas companies operating under GFU scheme, claiming that the scheme infringed upon the EU competition rules. Subsequently, during the hearing, the Norwegian gas producers along with the Norwegian government argued that EU competition rules are not applicable to this case because the scheme had been abolished by Royal Decree in June 2001.691 Besides, Norwegian gas producers argued that the Norwegian government forced them to sell gas 2. 687 Park, 2013, p. 279. 688 Uchelen & Roggenkamp, 2004, p. 455. 689 Although individual gas producers in Norway could de jure independently and bilaterally enter into agreements with buyers, the GFU’s negotiating authority was in practice exclusive. Waloszyk, 2014, p. 63; Talus, 2013, p. 120. 690 European Commission, Commission objects to GFU joint gas sales in Norway, 2001. 691 European Commission, Commission successfully settles GFU case with Norwegian gas producers, 2002. Part 4 Competition in the European Energy Markets 168 through the GFU scheme and the government admitted that it created the GFU.692 Following the hearing, the Norwegian gas producers and the Commission explored the basis for a settlement. Most of the gas companies were willing to undertake commitments in order to settle.693 In subsequent negotiations between the Norwegian gas producers and the Commission, the following distinction was made694: – the permanent members of the GFU (Norsk Hydro and Statoil), – the six companies that sold Norwegian gas under contracts of sale negotiated by the GFU (ExxonMobil, Shell, TotalFinaElf, Conoco, Fortum and Agip) and – all other defendants in this case. The first group comprised Statoil and Norsk Hydro, and the settlement consisted of two main elements695: – terminating all joint marketing and sales activities unless these are compatible with EU competition rules, and – reserving certain gas volumes (more than 15 billion cubic metres) for new customers in Europe. Moreover, Norsk Hydro and Statoil committed to refrain from introducing territorial and any other type of sales restrictions in the associated contracts of sale even though this issue was not part of the GFU case.696 The second group, which comprised the other six Norwegian gas companies that operated under the GFU scheme, committed to cease their joint marketing and sales activities. As regards the third group, the Commission decided not to pursue the case on the express assumption that they would not sell Norwegian gas jointly in the future.697 692 Kjolbye, 2016, p. 185. 693 Cameron, 2007, p. 306. 694 Lindroos et al., 2002, p. 50; Uchelen & Roggenkamp, 2004, p. 456. 695 European Commission, Commission successfully settles GFU case with Norwegian gas producers, 2002. 696 Uchelen & Roggenkamp, 2004, p. 456. 697 European Commission, Commission successfully settles GFU case with Norwegian gas producers, 2002. § 9. Decisional Practice (Jurisprudence) in Energy Markets 169 The GFU case highlighted that, in order to successfully create a common gas market in Europe, competition must be introduced in the upstream sector. The case also demonstrated that competition issues between the EU and non-EU undertakings can be solved successfully. Moreover, the case established that the Commission is able to take into consideration the commercial interests of the concerned undertakings whilst ensuring that EU competition law is protected.698 Joint Marketing: DONG/DUC Subject Matter The case699 is related to the joint marketing activities of three Danish gas producers and to anticompetitive restriction clauses set out in their gas supply contracts with the Danish incumbent gas supplier DONG (Dansk Olie og Naturgas A/S).700 The Danish Underground Consortium (DUC) was a joint venture between Shell, AP Møller/Maersk and ChevronTexaco.701 Together with DONG, they were the largest oil and natural gas suppliers in Denmark. DUC partners produced around 90% of the gas for sale at the Danish continental shelf and sold it under three supply agreements exclusively to DONG. The clauses set in these contracts were considered horizontal as well as vertical restraints on competition by the Commission.702 On June 2001, the Commission initiated antitrust proceedings against DONG and DUC due to “joint marketing of North Sea gas”. The subject of the investigation consisted of the gas sales agreements in 1979, 1990 and 1993 between DONG and each of the DUC partners. According to these agreements, DUC partners sold DONG gas that could meet all of Denmark’s gas demand, and they supplied additional volumes for Sweden and Germany. B. 1. 698 Lindroos et al., 2002, p. 51. 699 European Commission, Commission and Danish competition authorities jointly open up Danish gas market, 2003. 700 European Commission, Application of competition rules to the gas sector, 2003. 701 DUC, which accounts for 90% of Danish gas production, is composed of Shell (46%), AP Møller (39%) and ChevronTexaco (15%). 702 Lowe, 2003, p. 5. Part 4 Competition in the European Energy Markets 170 Preliminary Assessment and Decision The Commission focused on joint marketing and the restrictive provisions of gas supply agreements concluded between DONG and DUC.703 It established that these agreements contained horizontal (joint marketing) and vertical restraints (the reduction clause and restrictions on use). Although the gas supply agreements were negotiated jointly by the DUC partners and DONG, they were entered into separately by each of the DUC partners and by DONG. The agreements contained clauses concerning DUC partners giving some priority rights to DONG over the sale of “additional” or newly discovered gas volumes. Furthermore, the agreements contained pricing formulas which varied according to the customers to whom DONG resold the gas. Additionally, the agreements contained a mechanism that became operational if the parties commenced sales in Denmark itself.704 The Commission first addressed horizontal restraints (joint marketing). It concluded that such joint marketing agreements reduce the possibilities of customers to choose between suppliers/producers and thus considerably restrict competition, which results in infringement of EU competition law.705 During the investigation, it was claimed that DUC partners’ joint marketing activities were in the scope of the Block Exemption Regulation. However, the Commission did not agree that the Block Exemption Regulation could be used, and it argued that the conditions for joint distribution exception were not present.706 An exemption was not appropriate since joint marketing does not usually contribute to improve the production or distribution of goods within the meaning of Article 101(3) TFEU.707 The arguments of both sides were inconclusive. However, while reserving their legal position, DUC partners and DONG offered the following commitments which brought the investigation to a conclusion708: 2. 703 Cameron, 2007, p. 308. 704 Ibid. 705 Lowe, 2003, p. 5. 706 Kjolbye, 2016, p. 209. 707 Cameron, 2007, p. 309. 708 Ibid. § 9. Decisional Practice (Jurisprudence) in Energy Markets 171 – to discontinue joint marketing activities for un-contracted gas extracted from the Danish continental shelf; – to market all new gas individually in the future; – to carry out negotiations individually concerning existing contracts when prices were renegotiated; – to offer for sale 7 billion cubic meters of gas to interested third parties.709 Secondly, the Commission conducted an investigation regarding vertical restraints based on the horizontal approach. The DONG/DUC case raised the following issues relating to vertical restraint710: – Restraints imposed on DUC partners in their function as suppliers (reduction clause): The 1993 gas supply agreement between DUC partners and DONG included a necessary adjustment mechanism. According to this mechanism, if the DUC partners commenced sales of gas into Denmark, the DUC partners and DONG had to agree on adjustments to the gas supply agreements such as the takeor-pay obligations of DONG.711 The Commission stated that such a clause would hinder entrance by the DUC partners into the downstream Danish gas markets.712 DONG agreed to limit the scope of the clause by not invoking it for gas originating from sources other than the DUC gas fields. Moreover, DONG undertook to waive the clause once a new pipeline is commissioned linking the gas fields on the Danish continental shelf with other continental European countries.713 – Restraints imposed on DONG in its function as buyer/customer (restriction on use): According to supply agreements, DONG was required to report to the DUC partners the volumes of gas sold to 709 Kjolbye, 2016, p. 209. 710 Lowe, 2003, p. 6; Schnichels & Valli, 2003, p. 61. 711 The Commission stated that this case was similar to the reduction clause described in previous decisions. For more information regarding reduction clause, see: European Commission, Commission clears gas supply contracts between German gas wholesaler WINGAS and EDF-Trading, 2002; Cameron, 2007, p. 310. 712 Lowe, 2003, p. 6. Part 4 Competition in the European Energy Markets 172 certain categories of consumers in order to benefit from special price formulas for these customers. The Commission considered this situation as a specific form of use restriction.714 DONG was not free to sell the gas to whichever customer it chose without running the risk that it would lose the benefit of the specific price formula. The DUC partners and DONG committed to amend their supply contracts, and DONG undertook to refrain from buying the volumes dedicated by the DUC partners to new customers. The settlement of the DONG/DUC case brought important clarifications regarding the application of EU competition law to the gas market. The case established that the joint marketing of gas by gas producers was no longer acceptable by the Commission in the context of an ongoing EU energy market liberalisation.715 Moreover, it was also established that certain forms of vertical restraint such as reduction clauses and use restrictions which hinder competition are no longer acceptable in a liberalised gas environment. For this reason, the DONG/DUC case set an important example of how competition law contributes to the liberalisation of European energy markets.716 Market Sharing: E.ON/GDF Subject Matter The case717 is related to the infringement of Article 101 TFEU from 1980 to 2005 through agreements/concerted practices. The parties agreed to only offer gas transported through their jointly owned pipeline, MEGAL, to customers in their respective territories and to monitor the implementation of the agreement.718 E.ON is a leading German energy company active in the production, transportation, distribution and supply of electricity and gas in C. 1. 713 European Commission, Commission and Danish competition authorities jointly open up Danish gas market, 2003; Cameron, 2007, p. 310; Schnichels & Valli, 2003, p. 62. 714 Cameron, 2007, p. 311. 715 Schnichels & Valli, 2003, p. 63. 716 Cameron, 2007, p. 312. 717 Case COMP/39.401, E.ON/GDF, Commission Decision of 8 July 2009. 718 Ibid., para. 3. § 9. Decisional Practice (Jurisprudence) in Energy Markets 173 Europe. It is the largest natural gas supplier in Germany. GDF Suez (Gaz de France Suez) is the leading gas supplier in France and it is active in both upstream and downstream segments of the electricity and gas sectors. On May 2006, the Commission carried out unannounced inspections at the premises of E.ON Ruhrgas719 and GDF. The Commission suspected that E.ON and GDF breached the competition rules on restrictive business practices (Article 101).720 Following the inspection, the Commission initiated antitrust proceedings against E.ON and GDF Suez alleging the infringement of Article 101 TFEU on July 2007. The Commission focused on a possible agreement or concerted practice between E.ON and GDF to keep out of each other’s home market.721 Preliminary Assessment and Decision In 1975, E.ON and GDF agreed to jointly build the MEGAL pipeline to bring Russian natural gas into both France and Germany. In the meantime, they decided not to enter each other’s home markets through two side letters which prohibited Ruhrgas from transporting gas via the MEGAL pipeline to France and GDF from supplying customers in Germany with the gas transported through this pipeline.722 Until the expiry of the deadline for the transposition of Directive 98/30/EC into the domestic law in 2000, GDF had a legal monopoly on the import of gas into France. During the gradual liberalisation of the European gas markets, GDF lost its dominant position as an import monopoly; however, the parties continued to apply this market-sharing agreement (the 1975 side letters), and this helped them to maintain their market power. E.ON and GDF took measures to protect their powerful position in the German and French markets respectively.723 2. 719 The company was formerly known as Ruhrgas AG. Until 2013, Ruhrgas was wholly owned by E.ON. On 2 May 2013, E.ON Ruhrgas was merged with E.ON Global Commodities SE. 720 European Commission, Antitrust: Commission opens formal proceedings against E.ON and Gaz de France concerning suspected market-sharing, 2007. 721 Ibid. 722 Case COMP/39.401, E. ON/GDF, Summary of Commission Decision of 8 July 2009, para. 3. 723 Battista et al., 2009, p. 38. Part 4 Competition in the European Energy Markets 174 During the investigation, the Commission realised that the infringement in the German gas market began on 1 January 1980 when the MEGAL pipeline became fully operational. As for the French gas market, the Commission concluded that the infringement began on 10 August 2000 when GDF lost its dominant position concerning gas import to France. E.ON and GDF met regularly at various levels, discussed how to implement the agreement in the newly liberalised market and monitored each other’s actions.724 The agreement was not terminated until 30 September 2005.725 With the decision of 8 July 2009, the Commission concluded that E.ON and GDF infringed Article 101 TFEU, and both firms were fined.726 The decision of the Commission stated that agreements regarding market sharing constituted the most serious infringements under Article 101 TFEU.727 The Commission issued a fine, thus for the first time sanctioning an antitrust infringement in the energy sector. Additionally, it stated that the firms or persons harmed by the agreement could file actions for compensation in national courts. In the words of Kroes: “This decision sends a strong signal to energy incumbents that the Commission will not tolerate any form of anticompetitive behaviour. Market sharing is one of the worst types of antitrust infringement. This agreement deprived customers of more price competition and more choice of supplier in two of the largest gas markets in the EU. The Commission has no alternative but to impose high fines.”728 Based on its investigation, the Commission concluded that these anticompetitive agreements were in force during a vast period of time and that such an infringement had an important impact on the market because it empowered the monopolies and delayed the effects of liberalisation.729 E.ON and GDF filed an appeal against the Commission’s decision in 2009. In its 29 June 2012 decision, the General Court mostly upheld 724 European Commission, Antitrust: Commission fines E.ON and GDF Suez €553 million each for market-sharing in French and German gas markets. 2009. 725 Case COMP/39.401, E. ON/GDF, Summary of Commission Decision of 8 July 2009, para. 4. 726 Ibid., para. 13 727 Ibid., para. 364. 728 European Commission, Antitrust: Commission fines E.ON and GDF Suez €553 million each for market-sharing in French and German gas markets. 2009. 729 Battista et al., 2009, p. 39. § 9. Decisional Practice (Jurisprudence) in Energy Markets 175 the Commission’s decision. It found, however, that the Commission made errors in determining the duration of the infringement.730 According to the General Court, the Commission made two errors: firstly, when the infringement on the German market started, and secondly, when the infringement on the French market ended. On the one hand, the Commission did not show that there was potential competition in the period from 1980 to 1998, which could have been affected by the MEGAL agreement, in the German gas market. The General Court therefore annulled the Commission’s decision regarding the period from 1980 to 1998.731 On the other hand, the Commission had failed to demonstrate, with regard to the French market, that the infringement continued following the MEGAL agreement of August 2004. Accordingly, the General Court annulled the Commission’s decision on this point.732 Taking into consideration the partial annulment of the Commission’s decision, the General Court reduced the amount of the fine imposed on the two companies.733 In the E.ON/GDF case, the Commission and the General Court imposed fines for the first time for a substantive antitrust violation in the energy sector based on Article 101 TFEU, and it is the only case which did not result in a commitment since the energy sector inquiry.734 In the absence of such a commitment, the Commission’s decision could be appealed before the General Court by the parties concerned and it was the subject of an assessment as to its legality. The General Court considerably reduced the extraordinarily high fine imposed by the Commission.735 730 Case T-360/09, Judgment of the General Court of 29 June 2012, para. 125. 731 Hofmann, 2013, p. 32. 732 Case T-360/09, Judgment of the General Court of 29 June 2012, para. 246. 733 European Commission, The fines of €553 million imposed on GDF and E.ON for sharing the French and German markets for natural gas are reduced to €320 million for each company, 2013. 734 Hofmann, 2013, p. 329. 735 Ibid. Part 4 Competition in the European Energy Markets 176 Non-Competing: EPEX Spot and Nord Pool Spot Subject Matter The case736 is related to the single and continuous infringement of Article 101 TFEU pertaining to spot electricity trading services737 from 21 June 2011 until 7 February 2012. The parties, EPEX Spot and Nord Pool Spot, engaged in a non-competition arrangement covering all their electricity spot trading services in the EEA and beyond.738 EPEX Spot is an exchange for power spot trading in Western European countries such as Germany, France, the United Kingdom, the Netherlands, Belgium, Austria, Luxembourg and Switzerland. It is a joint venture established through the merger of the spot activities of Powernext SA in France and the European Energy Exchange AG in Germany. Nord Pool Spot is an electricity market that is used by Nordic power producers and buyers for trading with one another and operates in Estonia, Latvia, Lithuania, Denmark, Sweden, Norway, Finland, Germany and the UK. It is currently owned by the Nordic and Baltic Transmission System Operators. From 7 to 9 February 2012, the Commission carried out unannounced inspections at the premises of EPEX Spot (in France) and Nord Pool Spot (in Finland, Norway and Sweden).739 On 22 March 2013, the Commission initiated proceedings against the parties alleging a non-competing agreement with a view to engaging in settlement discussions with them.740 Preliminary Assessment and Decision The parties agreed not to compete with one another for their spot electricity trading services in the EEA, in particular by allocating territo- D. 1. 2. 736 Case AT 39.952, EPEX Spot – Nord Pool Spot AS, Commission Decision of 5 March 2014. 737 Spot trading means trading in the short run, such as within the same day or for the next day. 738 Case AT 39.952, EPEX Spot – Nord Pool Spot AS, para. 24. 739 European Commission, Antitrust: Commission confirms unannounced inspections in the electricity sector, 2012. 740 Case AT 39.952, EPEX Spot – Nord Pool Spot AS, para. 18. § 9. Decisional Practice (Jurisprudence) in Energy Markets 177 ries between themselves.741 According to the Commission, they aimed at restricting competition among each other, protecting their traditional strongholds and agreeing on expansion to new countries while maintaining the power balance between themselves.742 The non-competition arrangement was established in the context of legitimate cooperation between stakeholders. The parties decided to establish a joint approach on the technical systems to be used for cross-border trade.743 The goal was to develop an optimal joint system platform for both day-ahead and intraday trading to meet customers’ expectations.744 However, the Commission found that the parties had used this initiative as a cover to enter into a non-competition arrangement. Concerning territorial allocation, the aim of their anticompetitive agreement was to protect their traditional strongholds by not operating in each other’s home markets.745 The parties also agreed to share new markets. Countries south of Poland were reserved for EPEX Spot and countries north of Poland (including Poland) were reserved for Nord Pool Spot.746 The infringement lasted for at least seven months from 21 June 2011 until 7 February 2012, ending when the Commission carried out unannounced inspections at the companies’ premises.747 The Commission concluded that the agreement established by EPEX Spot and Nord Pool Spot presented all the characteristics of an agreement and/or a concerted practice which is prohibited by Article 101 TFEU.748 The Parties had participated in a single and continuous infringement of Article 101 TFEU. The Commission therefore imposed fines on the parties that committed the infringement.749 741 Ibid., para. 28. 742 Ibid., para. 24–25. 743 European Commission, Antitrust: Commission fines two power exchanges € 5.9 million in cartel settlement, 2014. 744 Nord Pool Spot, The Leading Power Market, 2013, p. 7. 745 Case AT 39.952, EPEX Spot – Nord Pool Spot AS, para. 30. 746 Ibid., para. 31. 747 European Commission, Antitrust: Commission fines two power exchanges € 5.9 million in cartel settlement, 2014. 748 Case AT 39.952, EPEX Spot – Nord Pool Spot AS, para. 43. 749 Ibid., para. 66. Part 4 Competition in the European Energy Markets 178 Power exchanges are critical to the efficient functioning of electricity markets, as they increase liquidity. The Commission’s decision highlighted that the EU competition law applies not only to energy suppliers, traders and purchasers but also to the power exchanges themselves. Thus the allocation of trading markets is considered an infringement of that law.750 According to Joaquín Almunia, the decision is significant, because power exchanges are central to the efficient functioning of electricity markets; it is in the best interest of consumers and is also a good illustration of how EU competition policy helps to build and sustain the Single Market.751 It can be also said that the Commission used EU competition law as a tool to lower energy prices by penalising the misconduct and collusive practices of EPEX Spot and Nord Pool Spot.752 Article 102 Exclusionary Abuses (Network Related Foreclosure) Capacity Hoarding: RWE, ENI and ČEZ RWE Subject Matter The case753 is related to third-party access on a regional wholesale market in Germany and to an alleged abuse of a dominant position through raising rivals’ costs and refusing new entrants access to the capacity on RWE’s gas transport infrastructure.754 RWE, a fully integrated German-based energy and utility company, is primarily active in the production and supply of electricity as well as in the production, II. A. 1. a. 1) 750 Ratliff & Grasso, 2014, p. 372. 751 European Commission, Statement by Vice-President Joaquín Almunia on antitrust decisions on power exchanges, 2014. 752 European Economic and Social Committee, Opinion of the European Economic and Social Committee on the Report on competition policy 2014, 2015, para. 2.7. 753 Case COMP/39.402, RWE Gas Foreclosure, Commission Decision of 18 March 2009. 754 Talus, 2011, p. 208. § 9. Decisional Practice (Jurisprudence) in Energy Markets 179 transmission, import and storage of gas and in downstream gas distribution. On 20 April 2007, the Commission initiated antitrust proceedings against RWE claiming that RWE refused third-party access to its natural gas transportation network, subsequently abused its dominant position by means of margin squeeze and, hence, infringed Article 102 TFEU. The antitrust proceedings against RWE were initiated based on the information obtained during the inspection755 carried out in 2006, which gave rise to suspicions that RWE created obstacles to third-party access on the regional wholesale market in its core area in North Rhine-Westphalia.756 The pertinent practices put forth by RWE which were believed to have infringed upon Article 101 TFEU included fixed prices for access to the gas network operated by RWE TSO, inflation of RWE TSO’s costs, maintenance of an artificial network fragmentation and failure to release transportation capacity to allow customer switching. These practices created additional obstacles for RWE’s competitors to access the regional bulk gas supply market, which resulted in preserving RWE’s dominant position in the gas supply market, market foreclosure and the detriment of consumers.757 Relevant Markets and Dominant Position In the preliminary assessment, the relevant markets were identified as the markets for the sale (supply) of gas and the markets relating to gas infrastructure, such as gas transport services.758 The gas supply market was divided into two groups: wholesalers759 and end customers760. 2) 755 European Commission, Competition: Commission has carried out inspections in the EU gas sector in five Member States, 2006. 756 European Commission, Antitrust: Commission initiates proceedings against RWE Group concerning suspected foreclosure of German gas supply markets, 2007. 757 European Commission, The Commission decided to initiate antitrust proceedings in case COMP/B1/39402, 2007. 758 Case COMP/39.402, RWE Gas Foreclosure, para. 12. 759 “Regionalferngasgesellschaften” (regional distributers) and “Stadtwerke” (smaller distributers). 760 Large industrial customers and smaller customers such as household and small commercial customers. Part 4 Competition in the European Energy Markets 180 With regards to the gas transport market, the Commission defined two markets, a gas transmission market for services offered by TSOs, on the one hand, and the gas distribution market offered by DSOs, on the other hand. The reason behind this distinction was that competitive conditions in both segments differ significantly.761 Regarding the relevant geographic market, in the preliminary assessment it was concluded that the gas transmission market cannot be defined larger than grid-wide due to the fact that the construction of competing parallel gas networks is not economically viable in most cases. Therefore, competitive constraints from TSOs outside RWE’s network remain negligible. Moreover, the gas downstream (supply) markets were also defined as grid-wide due to missing competitive constraints from suppliers outside RWE’s gas network.762 According to the preliminary assessment, RWE might have held a dominant position in the gas transmission market within its grid area since 2003, on the one hand, and also in downstream supply markets within its grid, on the other hand. Concerning the transmission of gas, the Commission noted that the majority of customers had no other choice than RWE’s network for their gas transmission needs as it was not possible to build new connections to other pipelines due to absence of economically viable conditions.763 As regards the downstream (supply) markets, the Commission observed that third-party suppliers were not able to compete with RWE within its grid, because they were limited due to the small volumes of transport capacities available to them. It was therefore concluded in the preliminary assessment that RWE might have held a dominant position on the wholesale supply markets within its grid area.764 Preliminary Assessment and Decision The Commission gathered evidence that RWE may have pursued a systematic strategy aimed at foreclosing potential third-party transport 3) 761 Case COMP/39.402, RWE Gas Foreclosure, para. 13. 762 Ibid., para. 15. 763 Ibid., para. 18. 764 Ibid., para. 19. § 9. Decisional Practice (Jurisprudence) in Energy Markets 181 customers and keeping transport capacities for itself, especially on important bottlenecks. Indeed, RWE booked almost the entire capacity on its transmission network on a long-term basis. Therefore, the opportunities for competitors to get access to RWE’s transmission network were already reduced. In other words, demand for transmission capacities on RWE’s network by third-party transport customers who sought to compete with RWE in the downstream gas distribution markets largely exceeded the offered capacities by RWE, which led to numerous rejections of transmission requests. In the preliminary assessment, the Commission concluded that RWE failed to justify these rejections.765 Furthermore, the Commission found that RWE prevented many competitors from gaining access to its network by understating its technically available capacity and managing the scarce transport capacities on its network. Consequently, only a small portion of the transport capacity on RWE’s transmission grid was made available to new entrants, who thus were not able to compete in an effective manner on the downstream supply market.766 RWE was firstly accused of allocating the capacity for its own downstream supply businesses, especially in bottlenecks.767 According to the estimates of the Commission, RWE deliberately prevented the access of rivals with respect to the gas network by the poor management of the capacity by RWE Transportnetz Gas GmbH, the subsidiary of RWE, and did not systematically leave free the distribution capacity.768 RWE reserved the capacity for its own supply businesses for a long time through its own TSO and refused the capacity requests from other parties. According to the Commission, another reason for refusing these distribution demands was probably RWE’s keeping its readyto-use capacity values low. In fact, the capacity used by RWE on the bottlenecks was much lower than the estimated highest technical capacity. According to the Commission, this conduct of RWE indicated the intention to deliberately exclude potential third-party distribution clients (capacity hoarding). One of the reasons for refusing third-party 765 Ibid., para. 24–26. 766 Koch et al., 2009, p. 32. 767 Hauteclocque, 2016, p. 344. 768 Hofmann, 2013, p. 258. Part 4 Competition in the European Energy Markets 182 requests was that RWE had not implemented an effective congestion management.769 The Commission’s second concern was related to the possible abuse of the dominant position by a behaviour aiming at lowering the margins of RWE’s downstream competitors in gas supply (margin squeeze). There were indeed indications that RWE might have squeezed the margins of its rivals by implementing its transmission tariffs at an artificially high level with very low tariffs within the downstream supply market.770 It can be argued that RWE was likely to have kept its prices immensely high with the aim to decrease the margins of its rivals. Such behaviour had the effect of preventing RWE’s competitors from competing effectively on the downstream gas supply markets, or limiting the ability of competitors or potential entrants to remain in or enter the market.771 Indeed, its rivals could not compete in the gas transmission market as effectively as could RWE. Thus, it became difficult for new rivals to enter into the market. On 18 March 2009, the Commission accepted the legally binding commitments suggested by RWE for solving concerns arising from the investigation.772 RWE committed to divest its German high-pressure gas transmission network including assets, personnel and ancillary services necessary for a viable gas transport business. Moreover, it committed to sell this network to a purchaser who was independent from RWE and who did not give rise to prima facie competition concerns.773 In its RWE decision, the Commission concluded that the problem emerged from RWE’s vertically integrated structure covering import, supply and network operation activities. The Commission took structural measures against RWE due to the possibility of market closure in the natural gas network, and, as a result, RWE agreed voluntarily to unbundle ownership of its natural gas transmission network. This commitment of RWE is considered an indication that ownership of the network does 769 Ibid. 770 Hauteclocque, 2016, p. 344. 771 Case COMP/39.402, RWE Gas Foreclosure, Commission Decision of 18 March 2009, para. 30. 772 Hofmann, 2013, p. 259. 773 Case COMP/39.402, RWE Gas Foreclosure, para. 38; European Commission, Antitrust: Commission market tests commitments proposed by RWE concerning German gas market, 2008. § 9. Decisional Practice (Jurisprudence) in Energy Markets 183 not constitute a requirement for natural gas commerce.774 As understood from the RWE decision, the Commission aimed at eliminating the disruptions in the liberalised energy market by accepting the legal commitments suggested by the party under investigation. ENI Subject Matter The case775 is related to capacity hoarding and strategic underinvestment in the transmission system, leading to the foreclosure of competitors and harm for competition and customers in one or more supply markets in Italy. ENI is an Italian state-controlled company mainly operating at multiple levels of the production, transportation and supply chain in natural gas and oil markets. ENI (co‑)owned and controlled the main gas import pipelines into Italy (TAG776, TENP777 and Transitgas778 pipelines).779 Although it is predominantly active in Italy, it has operations in more than 70 countries. On 20 April 2007, based on the information it obtained during the inspection carried out in 2006780, the Commission initiated an ex‑officio investigation781 concerning the Italian company ENI and claimed b. 1) 774 Lohmann, 2009, pp. 103–104. 775 Case COMP/39.315, ENI, Commission Decision of 29 September 2010. 776 The Trans Austria Gasleitung (TAG) is a natural gas pipeline leading from the Slovak-Austrian border at Baumgarten an der March to Arnoldstein in the south, near the border with Italy. 777 The Trans Europa Naturgas Pipeline (TENP) is a natural gas pipeline which runs from the German-Netherlands border to the German-Swiss border. It carries North Sea natural gas from the Netherlands to Italy and Switzerland. 778 The Transitgas is a natural gas pipeline in Switzerland, which connects Trans Europa Naturgas Pipeline (TENP) from Wallbach at the German border and the Gaz de France gas grid from Rodersdorf/Oltingue at the French border. 779 Koch & Gauer, 2011, p. 216. 780 European Commission, Antitrust: Commission initiates proceedings against the ENI Group concerning suspected foreclosure of Italian gas supply markets, 2007. 781 The case aroused out of the inspection carried out in 2006 on ENI premises and premises of ENI subsidiaries in Italy, Austria and Germany. The European Commission carried out unannounced inspections at the premises of gas companies in five Member States on 16 May 2006. The countries concerned were Germany, Italy, France, Belgium and Austria. The Commission had reason to believe that Part 4 Competition in the European Energy Markets 184 that ENI was hoarding capacity and deliberately limiting investments in capacity on its networks, which resulted in foreclosing competitors as well as harming customers and competition in one or more supply markets in Italy.782 These practices created a bottleneck on import capacity and thus negatively impacted the security of gas supply in Italy.783 The Commission suspected that ENI abused its dominant position within the scope of Article 102 TFEU by a systematic and constructive refusal to supply on its international pipelines transporting gas into Italy, specifically on the TENP (1), Transitgas (2) and TAG (3) pipelines.784 Relevant Markets and Dominant Position Similar to the RWE Decision, in the preliminary assessment the Commission identified the relevant markets as the markets for the sale (supply) of gas and the markets relating to gas infrastructure, such as gas transport services. Within the gas transport market, the Commission made a clear distinction between high pressure transmission networks and low-pressure distribution networks, because competitive conditions in both markets differ significantly. As for the gas supply market, it was divided into two groups: wholesalers and end customers. 2) the companies concerned may have violated EU competition rules that prohibit restrictive business practices and/or abuse of a dominant market position. European Commission, Competition: Commission has carried out inspections in the EU gas sector in five Member States, 2006. 782 “The legal base of this procedural step is Article 11(6) of Council Regulation No 1/2003 and article 2(1) of Commission Regulation No 773/2004. Article 11(6) of Regulation No 1/2003 provides that the initiation of proceedings relieves the competition authorities of the Member States of their authority to apply Articles 81 and 82 of the Treaty. Moreover, Article 16(1) of the same Regulation provides that national courts must avoid giving decisions which would conflict with a decision contemplated by the Commission in proceedings that it has initiated.” European Commission, 2007. 783 European Commission, Antitrust: Commission confirms sending Statement of Objections to ENI concerning the Italian gas market, 2009. 784 Case COMP/39.315, ENI, Summary of Commission Decision of 29 September 2010, para. 5. § 9. Decisional Practice (Jurisprudence) in Energy Markets 185 The Commission considered all transport ways reaching Italy to meet the Italian bulk companies as important relevant markets in a geographical sense. It was concluded that, for the purpose of this case, all of the viable routes that could be used by a shipper/supplier to bring gas to the wholesale market in Italy constituted one relevant market.785 According to the Commission, ENI had a dominant position both in the natural gas distribution market in the direction of Italy and in the subsequent supply market. The Commission also concluded that ENI was in the dominant position in terms of gas transmission, particularly in terms of the gas transportation to and within Italy.786 Concerning the transmission of gas, the Commission concluded that ENI was in a dominant position on the market for the natural gas transport to Italy by means of its ability to effectively control and influence the usage of all viable international pipelines for shipping gas into Italy.787 As regards the downstream (supply) markets, it was established that ENI held a dominant position on the wholesale supply market in Italy as a whole and particularly on the market for gas supply to fired power plants and on the market for gas supply to large industrial customers.788 Preliminary Assessment and Decision The Commission put forth and presented three alternative justifications in accordance with its claim of abuse.789 Firstly, the Commission gathered evidence that ENI might have implemented a systematic 3) 785 Ibid., Commission Decision of 29 September 2010, para. 26. 786 “Notably, ENI controls (or joint controls) all those viable network infrastructures and owns the transport companies holding significant capacity/use rights on those import pipelines including the LNG Terminal, existing at the date the Statement of Objections was issued.” Ibid., para. 29–31. 787 Ibid., para. 30. 788 Ibid., para. 33. 789 Based on an assessment of ENI’s management and operation of the TENP/Transitgas and TAG pipelines, the Commission took the preliminary view that ENI may have foreclosed its competitors by refusing to grant them access to capacity available on its transport networks (capacity hoarding), by granting access in a less attractive manner (capacity degradation) and by strategically limiting investment. Ibid., para. 43. Part 4 Competition in the European Energy Markets 186 strategy to restrict the access of distribution clients to infrastructure capacities (capacity hoarding). ENI implemented this by refusing to offer existing available capacity upon the demand of third parties. ENI showed the current capacity lower than it actually was. The investigation of the Commission showed that short- and long-term demands of third parties were much higher than the amount of capacity offered by ENI and that this caused the refusal of these demands of third parties by ENI without any justified reason. The Commission investigated whether ENI had the related transport capacity in its pipelines, and it requested that ENI presents detailed information about the 2001–2007 period. In the framework of this analysis, the Commission concluded that, although ENI had enough capacity, it hoarded it and did not make it available to third parties.790 Secondly, the Commission further gathered evidence indicating that ENI made it difficult to purchase capacity and offered it to sale under inappropriate conditions that might cause its degradation (capacity degradation). This led to the deliberate delay in sharing the capacity or to the sales of it for a short time. Additionally, it was determined that ENI followed a strategy of deliberately avoiding capacity expansions in order to ultimately limit third-party access to capacity.791 Thirdly, an additional justification can be found in the investment decisions of ENI on whether it was necessary to increase the current transport capacity on pipelines and in the systematic limitation of strategic plans (investment less than strategically necessary and needed). ENI deliberately avoided increasing its capacity. In this context, the capacity demands of third parties were not considered as “Open Season Procedure” and their joint financing offers were not taken into consideration concretely.792During its investigation, the Commission found evidence that the reason for not undertaking additional investment on transport capacity was not the low profitability rate but the will to continue the control by ENI of its transport capacity. It was found that opening additional capacity to third-party use would increase competition in the downstream market and that ENI worried that its margin in this market would be in danger. 790 Maier‑Rigaud et al., 2011, p. 20. 791 Case COMP/39.315, ENI, para. 60. 792 Hofmann, 2013, p. 261. § 9. Decisional Practice (Jurisprudence) in Energy Markets 187 The Commission took a decision on 29 September 2010 and made binding the commitments suggested by ENI to cope with the preliminary concerns of the Commission that ENI might have abused its dominant position in the gas transport market.793 ENI committed to divesting its current shareholdings in the companies related to international gas transmission pipelines (TENP, Transitgas and TAG) to a suitable purchaser independent from and unconnected to ENI who does not raise prima facie competition concerns.794 According to the decision of the Commission on 29 September 2010, the commitments implemented by ENI were significant since they covered the structural divestiture of the international transport activities of ENI in Italy for gas import. The reason underlying the aforementioned decision was the will to solve the competition problems created in related pipelines which played a significant role in creating a single competitive European gas market.795 It can be said that the commitments that are the subject of the decision opened up the way for making the downstream supply market more competitive. The Commission stated that ENI’s avoidance of investment, when there was a clear demand, prevailed against the interests of the transmission company. ENI suggested some commitments including selling out its shares in transmission networks. With this decision, the Commission aimed at reviving proper incentives to manage and operate gas transport networks in Europe.796 In order to achieve this aim, ENI committed to divestiture of its gas networks. The Commission’s ENI decision followed a line started with the RWE case. In both cases, the distortion of competition was caused by an internal conflict of interest resulting from vertical integration of an energy undertaking which owns and operates the electricity or gas transmission network while also supplying electricity or gas in its network area. This conflict of interest was addressed by the Commission through imposition of a structural remedy which required the vertically integrated entity to separate the ownership of the network from its 793 Maier‑Rigaud et al., 2011, p. 18. 794 Case COMP/39.315, ENI, Summary of Commission Decision of 29 September 2010, para. 7. 795 Maier‑Rigaud et al., 2011, p. 18. 796 Ibid., p. 23. Part 4 Competition in the European Energy Markets 188 other activities. The ENI decision demonstrated that structural remedies are indeed a legitimate and proportionate means to address distortion of competition caused by anticompetitive conduct of vertically integrated undertakings.797 ČEZ Subject Matter The case798 is related to the anticompetitive conduct of ČEZ within the Czech electricity market, particularly to the pre-emptive booking of capacities in the Czech electricity transmission network with the aim of hindering the entry of competitors into the market.799 The stateowned undertaking ČEZ is the incumbent operator in the Czech electricity market. ČEZ is active in a number of areas of the electricity and lignite sectors in the Czech Republic (lignite mining and trading, electricity generation, distribution, trading and supply) and several other countries in Europe (Bulgaria, Germany, Hungary, Poland, Romania, Slovakia and Turkey). On 24 November 2009, the Commission carried out an inspection without prior notice at the premises of the energy company ČEZ. The Commission had reason to believe that ČEZ had performed certain activities unilaterally or together with other market players which caused significant damage to competition and subsequently led to strengthening its dominant position within the Czech wholesale electricity market. The Commission was concerned that these activities would increase prices in the Czech wholesale electricity market and would cause the exclusion of rivals in the market.800 In the follow-up to the inspection on 24 November 2009, the Commission initiated on 11 July 2011 antitrust proceedings to determine whether ČEZ was in a dominant position as regards electricity production in the Czech Republic c. 1) 797 Ibid. 798 Case AT 39.727, ČEZ, Commission Decision of 10 April 2013. 799 Ibid., para. 1. 800 European Commission, Antitrust: Commission confirms inspections in Czech electricity sector, 2009. § 9. Decisional Practice (Jurisprudence) in Energy Markets 189 and whether it infringed upon Article 102 TFEU by abusing its dominant position in the electricity market.801 Relevant Market and Dominant Position According to the preliminary assessment of the Commission, the relevant product market was segregated into the electricity generation and wholesale supply markets. Such segregation included the electricity generated in and imported into the relevant geographic area through interconnectors.802 Concerning the geographic market, the Czech electricity production and wholesale markets were considered national. This was based on the different structures of supply in the Czech Republic and in the neighbouring countries, the different fuel mix of the power plants in the Czech Republic and in neighbouring countries and the existence of congestion at interconnection points with neighbouring Member States.803 According to the preliminary assessment, the Commission provisionally concluded that ČEZ held a dominant position on the market for the electricity generation and wholesale supply in the Czech Republic during the relevant period (2007–2012).804 Preliminary Assessment and Decision The Commission raised the concern that ČEZ might have abused its dominant position on the generation and wholesale supply of electricity markets in the Czech Republic. More specifically, ČEZ might have pursued a strategy aiming at preventing new market entry. As part of this strategy, in January 2007 ČEZ made a potentially pre-emptive reservation in the Czech electricity transmission system.805 Thus the 2) 3) 801 European Commission, Antitrust: Commission opens formal proceedings against Czech electricity incumbent ČEZ, 2011. 802 Case AT 39.727, ČEZ, Commission Decision of 10 April 2013, para. 11. 803 Ibid., para. 12. 804 Ibid., para. 14. 805 Ibid., para. 22. Part 4 Competition in the European Energy Markets 190 Commission concluded in the preliminary assessment that ČEZ might have reportedly abused its dominant position in the market by reserving in advance its capacity in the transmission network. As a result of ČEZ’s pre-emptive reservation, the available transmission capacity which could have otherwise been used by ČEZ’s competitors was exhausted. Consequently, these competitors could have been denied access to the transmission network system, a condition indispensable for every large-scale electricity generator.806 According to the Commission, due to the aforementioned reason the rivals were prevented from entering into the electricity wholesale and production market.807 On 10 April 2013, the Commission declared that the commitments of ČEZ are legally binding. ČEZ agreed to divest its energy power plant (Pocerady, Chvaletice or Melnik III and Tisova) and, hence, liberate nearly 800–1000 m3 of its production capacity.808 Long Term Capacity Booking: GDF Suez and E.ON GDF Suez Subject Matter The case809 is related to the anticompetitive practices conducted by GDF Suez in the French gas market, such as long-term reservation of transport capacity and a network of import agreements, but also underinvestment in import infrastructure capacity.810 GDF Suez is the leading gas supplier in France which controls, via its subsidiary GRTgaz, the most important gas transmission networks in France. GDF Suez clearly enjoyed a dominant position in the gas import and supply markets in the two French balancing zones (North and South) of the GRTgaz transport network. 2. a. 1) 806 Ibid., para. 26. 807 European Commission, Antitrust: Commission opens formal proceedings against Czech electricity incumbent ČEZ, 2011. 808 Case AT 39.727, ČEZ, Summary of Commission Decision of 10 April 2013, para. 11; European Commission, Antitrust: Commission accepts commitments from ČEZ concerning the Czech electricity market and makes them legally binding, 2013. 809 Case COMP/39.316, GDF Suez, Commission decision of 3 December 2009. 810 European Commission, Antitrust: Commission opens formal proceedings against Gaz de France concerning suspected gas supply restrictions, 2008. § 9. Decisional Practice (Jurisprudence) in Energy Markets 191 Suspecting that GDF Suez infringed upon EU competition rules, the Commission carried out an inspection without prior notice at the premises of GDF Suez on 16 May 2006. Based on this inspection, the Commission initiated, on 22 May 2008, formal antitrust proceedings against GDF Suez with the claim that it abused its dominant position in the French gas market and thus infringed Article 102 TFEU.811 The Commission claimed that the actions of GDF Suez led to the foreclosure of the downstream natural gas supply market in France through long-term transport capacity reservations. It was concerned that this conduct largely closed off access to the French gas market to other potential gas suppliers. Relevant Market and Dominant Position In order to determine the relevant product market, the Commission distinguished the gas transmission market and the markets related to the infrastructure.812 Then, within the gas supply market, the Commission made a distinction between the wholesale supply of gas to the shippers and the retail supply to final customers. In its preliminary assessment, the Commission further divided the product market into two submarkets, namely the supply via the transmission or the distribution network and supply by a particular type of customer (household, professional or industrial).813 For the markets related to gas infrastructure, the Commission defined a market in terms of gas import capacity, including import capacity via gas pipelines and via LNG terminals. Concerning geographic markets, the Commission determined that each balancing zone of the transport network in France constituted a geographic market for gas supply because of the different conditions for transporting gas to and between those zones. Moreover, the zones differed with regard to market shares of suppliers.814 2) 811 Ibid. 812 Case COMP/39.316, GDF Suez, Commission decision of 3 December 2009, para. 11; Hofmann, 2013, p. 286. 813 Ibid., para. 13. 814 Ibid., para. 16. Part 4 Competition in the European Energy Markets 192 According to the preliminary assessment of the Commission, it has been provisionally concluded that GDF Suez held a dominant position on the gas import and supply markets in each of the balancing zones (North and South) of the GRTgaz transport network.815 Preliminary Assessment and Decision On 22 June 2009, the Commission adopted a preliminary assessment concerning the alleged infringements carried out by GDF and its subsidiaries, GRT S.A. and Elengy S.A. (known jointly as “GDF Suez”) in the French gas market. After its investigation, the Commission concluded that GDF Suez abused its dominant position in a way infringing Article 102 TFEU and foreclosed access to gas import capacities in France. This situation caused the restriction of competition in the supply market. It can be said that the foreclosure was the result of the long-term reservation of most of the import capacity of France.816 The Commission stated that with the import capacity of GDF, including the interconnection capacity between the Northern and Southern balancing zones of GRTgaz network in France, the gas infrastructure constituted an important component regarding access to this infrastructure and that import capacity was a requirement for supplying gas in the balancing zones of the GRTgaz network.817 According to the findings of the Commission, GDF Suez reserved on a long-term basis an important percentage of the import capacity of GRTgaz network in each balancing zone. As a result of this long-term reservation, thirdparty shippers lacked the necessary access to this capacity under conditions which would allow them to exert effective competition on the downstream gas supply markets in these zones (long-term capacity booking).818 3) 815 Ibid., para. 18. 816 Notice published pursuant to Article 27(4) of Council Regulation (EC) No 1/2003 in Case COMP/B-1/39.316 – Gaz de France (gas market foreclosure), OJ C 156, pp. 25–26, para. 2–3. 817 Case COMP/39.316, GDF Suez, para. 26. 818 Ibid., para. 30. § 9. Decisional Practice (Jurisprudence) in Energy Markets 193 In its preliminary assessment, the Commission realised that there are further competition-related issues concerning a possible refusal by GDF Suez to supply import capacity at the Fos Cavaou LNG terminal.819 Although there was a demand for reserving a significant amount of the capacity, GDF Suez did not perform a clear, open, transparent and nondiscriminative process for allocating its capacity in the new Fos Cavaou terminal on a long-term basis. As a result, only one third-party supplier (Total) could obtain long-term capacities at the Fos Cavaou terminal.820 The Commission found that GDF Suez ignored the genuine proposals of third-party shippers to co-finance the construction of the Fos Cavaou terminal. Moreover, GDF Suez did not explore the possibility of increasing its reception capacity in order to facilitate third-party access to this infrastructure while the terminal was being built.821 Furthermore, GDF Suez allocated a substantial proportion of total capacity at the Fos Cavaou terminal to its own gas trading division on a longterm basis.822 Finally, the Commission expressed concerns regarding GDF Suez’s strategic limitation of investments in additional capacities at the Montoir de Bretagne liquid-gas terminal. It found that, even though GDF Suez knew that there was a demand for additional capacity and in spite of a study showing that extending capacity would have been profitable, GDF Suez refused to supply by means of a strategic limitation of investments in additional capacities (so-called strategic underinvestment). According to the Commission, GDF Suez’s refusal might constitute an infringement of Article 102 TFEU.823 In deciding not to extend the import capacities, GDF Suez had denied third parties’ extra capacity requests at the Montoir de Bretagne liquid-gas terminal and also narrowed the 819 Ibid., para. 31. 820 “On the contrary, the preliminary assessment showed that GDF Suez made third-party access to the Fos Cavaou terminal conditional on receiving nonmonetary strategic assets in return and that, as a result, no third-party (other than Total) obtained long-term capacity at the Fos Cavaou terminal.” Ibid., para. 32. 821 Ibid., para. 33. 822 Ibid., para. 34. 823 Monti, 2017, p. 32; Hofmann, 2013, p. 285; Case COMP/39.316, GDF Suez, para. 40. Part 4 Competition in the European Energy Markets 194 access possibilities, which made the gas import into France even more difficult.824 On 3 December 2009, the Commission adopted a decision making the commitments of GDF Suez legally binding. As an urgent measure, GDF Suez committed to release a large share of its long-term gas import capacity reservations in France to third parties in order to enable third-party shippers to reinforce rapidly their position on the downstream gas supply markets in France, thus increasing the competitive pressure on GDF Suez in the short term.825 Furthermore, GDF Suez committed to release significant firm long-term capacities at the Montoir de Bretagne and Fos Cavaou LNG terminals to third parties in the short term. In the long term, GDF Suez guaranteed to reduce its capacity reservations below 50% of total firm as of October 2014.826 According to Kroes, the commitments offered by GDF Suez enabled competitors to enter the French gas market. Consequently, consumers were offered a greater choice of gas suppliers and more competitive prices. The commitments assured to enable effective structural access to French gas import infrastructure and contributed to an integrated and competitive single European energy market, which could provide a secure supply of energy at affordable prices.827 E.ON Subject Matter The case828 is related to the competition-restricting conduct of E.ON AG and its subsidiaries, E.ON Ruhrgas AG and E.ON Gastransport GmbH, in the German gas supply and transmission markets. E.ON is one of the b. 1) 824 “As a result, GDF Suez not only prevented another shipper that had submitted a firm capacity request in the open season procedure from reserving capacity on a long-term basis, but it also greatly restricted any possibility of third-party access to this infrastructure until 2023, thereby making it even more difficult for third parties to import gas into France.” Case COMP/39.316, GDF Suez, para. 38. 825 Ibid., para. 67. 826 Ibid., para. 47. 827 European Commission, Antitrust: Commission accepts commitments by GDF Suez to boost competition in French gas market, 2009. 828 Case COMP/39.317, E.ON Gas, Commission Decision of 4 May 2010. § 9. Decisional Practice (Jurisprudence) in Energy Markets 195 largest European energy companies and performs production, transportation, distribution and supply of electricity and gas activities on a European level. It is the largest natural gas supplier in Germany, and it also operates the largest German gas transmission network. On 22 December 2009, the Commission initiated antitrust proceedings with an abuse claim against E.ON. The proceedings concerned an abuse of a dominant position in the form of a refusal to supply. According to the Commission, this could have been achieved by way of long-term bookings on E.ON’s gas transmission network, resulting in a foreclosure of competitors from access to that network. The suspected practice would have constituted an infringement of Article 102 TFEU. Relevant Market and Dominant Position In its assessment, the Commission made a distinction between the gas supply market and the gas transport market. According to the Commission, the distinction in terms of the gas transport market is dependent on whether the transport capacity is contracted as firm or interruptible capacity. A further distinction was made between the transport of the H-gas (high-calorific gas) and L-Gas (low-calorific gas).829 The transport of these two different gases is made through different pipelines and different networks. Within the gas supply market, a distinction can be made between the sale of gas to wholesalers (wholesale level) and to end customers (retail level). At the wholesale level, the Commission and the Bundeskartellamt generally make this distinction830: – Supra-regional gas companies, which purchase (import) gas from producers (mostly abroad), supply, inter alia, regional wholesalers which have no access to gas production. – Regional wholesalers sell gas to small local and regional distributors, i.e. mostly “Stadtwerke”. At the retail level, the Commission and the Bundeskartellamt made a distinction between supply of gas to large industrial customers and the 2) 829 Ibid., para. 15. 830 Ibid., para. 16. Part 4 Competition in the European Energy Markets 196 supply of gas to small customers (i.e. household and small commercial customers).831 The relevant geographic market was the respective gas transport network (E.ON Gastransport’s L-Gas network or E.ON H-Gas network, including the NCG market area). The Commission concluded that E.ON held a dominant position in both the H- and L-gas transport markets as well as in the markets for the supply of wholesalers and the retail supply to industrial customers. Preliminary Assessment and Decision In its preliminary assessment dated on 22 December 2009, the Commission found that E.ON reserved significant parts of the available firm and freely allocable entry capacities at the entry points giving access to its gas transmission grid and that such an action caused foreclosure of competitors trying to transport and sell gas to customers connected to the E.ON grid.832 Only little or no free capacity had been available to competitors wanting to transport gas into the network. As a result, E.ON had restricted competition in the downstream gas supply markets.833 The Commission also held that E.ON’s long-distance gas transmission network constitutes an essential facility. Access to it was objectively necessary to carry out business in the gas supply markets within E.ON’s grid areas.834 The evidence found by the Commission indicated that the capacity situation was not likely to improve in the next years and therefore competitors would not be able to compete freely and effectively. Indeed, based on current bookings it was clear that the capacity problem would remain at least until 2019. On 4 May 2010, the Commission took a decision according to Article 9 of the European Union Directive 1/2003. In this decision, the 3) 831 Ibid., para. 17. 832 “The Commission came to the provisional conclusion that E.ON may have abused its dominant position on the markets for the supply of end customers in the form of a refusal to supply by way of long-term bookings on E.ON’s gas transmission system, thereby violating Article 102 of the Treaty on the Functioning of the European Union (‘TFEU’).” Ibid., para. 2. 833 Ibid., Summary of Commission Decision, para. 3. 834 Ibid., para. 32. § 9. Decisional Practice (Jurisprudence) in Energy Markets 197 commitments of E.ON were declared to be legally binding. E.ON committed to release large capacity volumes at the entry points to its gas networks by October 2010. The capacities released at different entry points by October 2010 correspond to around 15% of the pipeline capacity and were to be published on the website of E.ON Gastransport. As of October 2015, E.ON further reduced its entry capacity bookings in its grid for low-calorific gas to 64% of the pipeline capacity and in the NetConnect Germany grid to 50%. The Commission expected the commitments to have a major structural impact by opening German gas market to new entrants, to the benefit of domestic and industrial gas consumers.835 In this case, the Commission did not impose a structural remedy, e.g. unbundling of the network. It believed that the reduction of E.ON’s share of transport capacity into its transmission grid would lead to a permanent change in the structure of German gas transport markets. The Commission highlighted that commitments must relate directly to a specific, potentially abusive, behaviour and must constitute a necessary, adequate and proportionate remedy. The behaviour identified by the Commission in its preliminary assessment concerned capacity reservations by E.ON as a shipper of gas.836 The Commission concluded that unbundling would therefore not have resolved the competition problem in this case, as E.ON’s long-term reservations would still close off competitors even if the grid would have been sold to another operator.837 835 European Commission, Antitrust: E.ON’s commitments open up German gas market to competitors, 2010. The European Commission has released the German energy firm E.ON from commitments to reduce long-term bookings on the German gas grid almost five years ahead of schedule since E.ON successfully implemented its commitments and competition on the market has increased significantly. European Commission, Antitrust: successful opening of German gas markets allows early termination of E.ON commitments, 2016. 836 European Commission, Antitrust: Commission’s commitment decision opens German gas pipelines to competitors – frequently asked questions, 2010. 837 However, in September 2010 the E.ON Gastransport (now Open Grid Europe) has been fully unbundled from the parent company E.ON and set up as an independent transmission operator. In November 2011, E.ON informed the Commission of its planned divestment of Open Grid Europe, and the sale has been completed seven months later. Part 4 Competition in the European Energy Markets 198 On 24 June 2016, E.ON requested to be released from the commitments. The Commission’s assessment showed that E.ON was no longer dominant in the gas transport market due to the divestment of its grid and that it is not evident that E.ON could still have a dominant position in the relevant gas supply markets.838 In July 2016, the Commission released E.ON from its commitments to reduce long-term bookings on the German gas grid almost five years ahead of schedule. The Commission concluded that competition on the market increased significantly as a result of successful implementation of the commitments by E.ON. The E.ON case set a good example of how the Commission’s commitments decision can open up markets to competition quickly and effectively.839 The commitments were deemed no longer necessary to ensure sufficient gas transport capacity for E.ON’s competitors. Summary Refusal to Supply Generally, any undertaking, whether it is in a dominant position or not, should have the right to choose its trading partners and to decide whether to supply them or not.840 Contractual freedom is one of the most important features of all market economies.841 Undertakings in a dominant position do not have an absolute duty to supply all those who request them to do so.842 However, contractual freedom is sometimes limited by certain provisions, such as Article 102 TFEU. The Commission therefore was of the opinion that an intervention based 3. a. 838 Case AT.39.767, E.ON Gas, Commission Decision of 26 July 2016, para. 12. 839 European Commission, Antitrust: successful opening of German gas markets allows early termination of E.ON commitments, 2016. 840 European Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, 2009, para. 75; Opinion Advocate-General Jacobs in Case C-7/97, Oscar Bronner GmbH v Mediaprint Zeitungs-und Zeitschriftenverlag, [1998] ECR I-7791, para. 56: “the right to choose one’s trading partners and freely to dispose of one’s property are generally recognised principles in the laws of the Member States […] Incursions on those rights require careful justification.” 841 Hauteclocque, 2016, p. 335. 842 Jones & Sufrin, 2016, p. 496. § 9. Decisional Practice (Jurisprudence) in Energy Markets 199 on EU competition rules requires a careful analysis where the application of Article 102 TFEU would lead to the imposition of a supply obligation on the dominant undertaking.843 According to the Commission, the existence of such an obligation may reduce the undertakings’ incentives to invest and innovate and, thereby, possibly harm consumers. On the one hand, being aware of the fact that they may be obliged to supply against their will may lead dominant undertakings — or undertakings which anticipate that they may become dominant — not to invest, or to invest less, in the activity in question. On the other hand, competitors may be tempted to free ride on investments made by the dominant undertaking instead of investing themselves. Neither of these consequences would, in the long run, be in the interest of consumers.844 Although all of the above-mentioned abuse cases in the energy sector, which concern types of anticompetitive behaviour (capacity hoarding and degradation, strategic underinvestment, margin squeeze and long-term bookings), may seem quite different, the Commission considered all these practices as a similar type of the abuse of a dominant position under Article 102 TFEU, namely refusal to grant access to essential facilities, a prominent sub-category of the refusal-to-supply concept.845 As a general principle, an objectively unjustifiable refusal to supply by an undertaking holding a dominant position on a market constitutes an infringement of Article 102 TFEU.846 The Commission defined an essential facility as a facility or infrastructure which is essential for reaching customers and/or enabling competitors to carry on their business, and which cannot be replicated by any reasonable means.847 A facility is essential if its duplication is impossible or extremely difficult due to physical, geographical, legal or 843 European Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, 2009, para. 75. 844 Ibid. 845 Koch & Gauer, 2011, p. 223. 846 London Economics, 1997, p. 138. 847 European Commission, Notice on the application of the Competition Rules to access agreements in the telecommunications sector, 1998, para. 68 Part 4 Competition in the European Energy Markets 200 economic constraints.848 The essential-facility doctrine imposes on owners of essential facilities a duty to deal with competitors849; in other words, holders of an “essential facility” can be obliged under competition law to grant access to this facility. According to the Commission's case practice, a refusal to grant access to an essential facility might constitute an abuse within the scope of Article 102 TFEU under the following circumstances850: – Access to a facility is indispensable and objectively necessary to be able to compete effectively on a downstream market. – The refusal is likely to lead to the elimination of effective competition on the downstream market. – The refusal is not objectively justified and likely to lead to consumer harm. Taking into consideration these criteria, the Commission concluded in all above-mentioned cases that the incumbents’ gas networks should be considered essential facilities, since access to these networks was crucial in order to supply gas to customers within the incumbents’ grid areas.851 According to the Commission, gas networks should be considered essential facilities due to the fact that transport capacity on a transmission grid is an essential structured component for competing gas suppliers wishing to supply customers on the grids of the gas incumbents. In other words, gas suppliers would not be able to transport gas to their customers as they have no alternative than to use the gas networks’ entry points to reach their customers within these networks. Considering high investment costs and long construction periods, the 848 Essential Facility, https://www.concurrences.com/en/droit-de-la-concurrence/glo ssary-of-competition-terms/Essential-facility (accessed: 1 June 2019). 849 Evrard, 2004. 850 European Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, 2009, para. 81. 851 Case COMP/39.402, RWE Gas Foreclosure, Commission Decision of 18 March 2009, para. 22; Case COMP/39.317, E.ON Gas, Commission Decision of 4 May 2010, para. 32. § 9. Decisional Practice (Jurisprudence) in Energy Markets 201 Commission concluded that the transport infrastructure could not easily be replicated by competitors.852 In all cases, the Commission determined that the gas incumbents not only controlled the markets for gas transport but all of them held dominant positions in one or more gas supply markets and, moreover, could maintain, or reinforce, their position by foreclosing access to the transmission grid.853 The refusal was in all cases found to be likely to hinder competition, and given the importance of the pipelines for the dramatically underdeveloped supply competition, there could be no doubt about the existence of the risk of consumer harm.854 Moreover, the Commission concluded that there was no obvious objective justification for the alleged anticompetitive behaviour. Capacity Hoarding/Capacity Degradation and Margin Squeeze The above-mentioned practices of RWE, ENI and ČEZ constitute typical examples of an abuse by vertically integrated undertakings. In these cases, the Commission gathered evidence indicating that the abovementioned companies pursued a systematic strategy aimed at keeping barriers for preventing new entrants from getting access to capacity on their networks. From the perspective of a dominant undertaking, indeed, it can make economical sense to avoid competition in the downstream business in order to protect their own supply business from competitive pressure through alternative offers.855 The Commission found that RWE, ENI and ČEZ performed a great variety of abusive behaviours, such as primary and secondary capacity hoarding, capacity degradation, capacity mismanagement, margin squeeze or strategic underinvestment strategies, in order to favour their own supply business.856 “Capacity hoarding” and “capacity degradation” are not defined as legal terms. While “capacity hoarding” usually refers to refusal to grant access to capacity available on the transport network, “capacity degradab. 852 Case COMP/39.317, E.ON Gas, para. 33. 853 Cardoso et al., 2010, p. 10. 854 Ibid., p. 10; Koch & Gauer, 2011, p. 224. 855 Koch & Gauer, 2011, p. 215. 856 Hofmann, 2013, p. 263. Part 4 Competition in the European Energy Markets 202 tion” refers to the granting of access to capacity in a less useful way.857 According to the Commission, there are two types of capacity hoarding, namely primary and secondary capacity hoarding. Primary capacity hoarding is defined as practices by which an undertaking makes less transport capacities available than it could. Secondary capacity hoarding concerns a strategy according to which energy companies “hoard” capacities they actually do not need.858 In both the RWE and the ENI Cases, the Commission found indications for an understatement of the available transport capacity by the TSO (primary capacity hoarding). The actual quantity of the capacity on RWE and ENI’s gas networks was different than set out in their statement. According to Koch & Gauer, the main obstacle to establishing primary capacity hoarding is, from a competition law enforcement perspective, related to the complexity of capacity calculation in gas transport pipeline systems. Particularly, capacity calculation in complex transport systems with numerous entry points is not just an equation that depends on simple technical parameters which can easily be verified by competition authorities. Capacity calculation may require a highly complex analysis not only of the technical setup but also of the possible and actual gas flows in the entire grid.859 Although it may be difficult for a competition authority to recalculate the exact capacity available at different entry points, there are certain indications to determine the understatement of the available capacity. In order to establish capacity understatement, the actual gas flows at a given entry or exit point can be analysed. If gas flows exceed systematically and significantly the indicated maximum available capacity, it may indicate a primary hoarding strategy.860 In ČEZ Case, the Commission concluded that ČEZ hoarded capacities it actually did not need (secondary capacity hoarding). As regards capacity degradation, the concept of abusive capacity degradation was first applied by the Commission in its ENI Decision. The Commission found evidence that ENI might have intentionally 857 European Commission, Antitrust: Commission confirms sending Statement of Objections to ENI concerning the Italian gas market, 2009. 858 Koch & Gauer, 2011, p. 216. 859 Ibid. 860 Ibid. § 9. Decisional Practice (Jurisprudence) in Energy Markets 203 delayed allocation of new available capacity or fragmented it into sales of short-term capacity even when it could have been offered on a longer-term basis.861 The Commission alleged that ENI’s allocation procedures caused separate and uncoordinated capacity sales on complementary pipelines.862 Moreover, the Commission found that the capacity offered by ENI was interruptible and not firm.863 As mentioned above, the Commission determined that such practice led to a foreclosure of competitors trying to supply gas into Italy and therefore restricted competition on the downstream gas supply markets.864 As mentioned above, there were concerns raised by the Commission that RWE might have abused its dominant position at the downstream level by means of a margin squeeze. The Commission found evidence that RWE followed a strategy whereby it could squeeze margins of its competitors on the downstream gas supply markets by setting its transmission tariffs at an artificially high level. Such a conduct could limit competitors’ or potential entrants’ ability to enter the market or maintain their position within the market, which could prevent even an efficient competitor from competing effectively.865 The establishment of a margin squeeze usually requires a detailed calculation of the dominant undertaking’s cost base (e. g. its long-term average incremental costs). Long-term Capacity Booking The GDF Suez and E.ON Gas decisions dealt with the issue that E.ON and GDF booked almost the entire capacity on their gas networks on a long-term basis for their own supply businesses, leaving virtually no place for a third party to transport gas.866 The issue of lack of transport capacities in Europe was discussed in the course of an energy sector inquiry. According to the inquiry, the vast majority of the primary cac. 861 Case COMP/39.315, ENI, para. 51. 862 Ibid., para. 53. 863 Ibid., para. 54. 864 Ratliff & Grasso, 2012, p. 5. 865 Case COMP/39.402, RWE Gas Foreclosure, para. 30. 866 Cardoso et al., 2010, p. 8. In other words, the incriminated behaviour consisted in the booking of large parts of capacities through GDF Suez’ and E.ON’s supply businesses on their “own” transmission network. See: Koch & Gauer, 2011, p. 221. Part 4 Competition in the European Energy Markets 204 pacity is typically held by only one or two market players, which are incumbents in their home markets.867 Mostly, integrated gas or electricity suppliers sign long-term capacity bookings with their downstream affiliate, which leave rather smaller capacities available to their competitors.868 Consequently, the competitors are not able to gain access to the pipelines necessary to reach their gas customers. The refusal leads to the prevention of the development of effective competition in the downstream market. The energy sector inquiry found that the newly created third-party access rights and non-discrimination rules, intended to open up the incumbents’ transmission networks, often had only limited or no effect, as most or even all gas transport capacities had already been booked through the vertically integrated owner of the networks.869 This issue was, for the first time at all in competition law, tackled by the Commission in the GDF Suez and E.ON decisions. In the GDF Suez and E.ON cases, the Commission focused on these two companies as shippers, not as transmission system operators, unlike the cases with RWE and E.ON. The GDF Suez and E.ON cases concerned reservations of capacity through the shipper of an integrated company on its own transmission network. In other words, the incriminated behaviour consisted in the booking of large parts of capacities through GDF Suez’ and E.ON’s supply businesses on their “own” transmission network.870 While the commitments of RWE and ENI aimed at eliminating the incentive to discriminate and at the correction of market distortion in the long-run, the commitments of GDF Suez and E.ON resulted in an immediate and long-term release of network capacity. However, given the duration of the commitments and the developments in the sectorspecific regulation, the commitments of GDF Suez and E.ON would, if properly overseen, also lead to a permanent change in the structure of gas markets.871 867 European Commission, Energy Sector Inquiry, 2007, p. 74. 868 Fumagalli et al., 2018, p. 469. 869 Cardoso et al., 2010, p. 8. 870 Koch & Gauer, 2011, p. 222. 871 Talus, 2011, p. 279. § 9. Decisional Practice (Jurisprudence) in Energy Markets 205 Strategic Underinvestment For the first time, the Commission referred in the GDF Suez and ENI cases to “strategic underinvestment” in the energy markets. It stated that an undertaking in a dominant position which holds an essential facility is under an obligation to take “all possible measures to remove the constraints imposed by the lack of capacity and to organise its business in a manner that makes a maximum amount of capacity of the essential facility available”.872 In the GDF case, the Commission concluded that the strategic underinvestment prevented another shipper, which had submitted a capacity request in the open season procedure, from reserving capacity on a long-term basis and hindered competitors’ access to the infrastructure for several years.873 It can be stated that, in the Commission’s view, an undertaking which holds an essential facility may be obliged to share the existing capacity, or even to make specific investments to expand the capacity, of its facility if there is appropriate demand and it makes economic sense to do so, looking at the facility concerned on a stand-alone basis.874 Exclusionary Abuses (Customer Foreclosure) Distrigas Subject Matter The case875 is related to the competition-restricting conduct of Distrigas S.A./Distrigas N.V. (hereafter “Distrigas”) in the Belgian gas market. Distrigas was the largest incumbent gas supplier and importer in the Belgian wholesale market. It was also operating in the gas supply markets in other European countries, such as Germany, France and the Netherlands, as well as in the gas transit and LNG markets. Distrigas was a subsidiary of Suez Group until it was sold to the Italian company ENI in May 2008. d. B. 1. a. 872 Case COMP/39.315, ENI, dipnot 43. 873 Merlino & Faella, 2013, p. 528. 874 Ratliff & Grasso, 2012. 875 Case COMP/37.966, Distrigas, Commission Decision of 11 October 2007. Part 4 Competition in the European Energy Markets 206 On 26 February 2004, the Commission initiated antitrust proceedings against Distrigas concerning its gas supply agreements with industrial clients. The Commission expressed concern that Distrigas prevented consumers from switching supplier and, hence, restricted them from entering into contracts with other gas suppliers through its long-term gas supply contracts. In this way, Distrigas foreclosed the entrance of its rivals into the Belgian gas supply market.876 Relevant Market and Dominant Position According to the Commission, the relevant product market was the supply of high-calorific gas to customers having a gas consumption of over 1 million m3 per annum and connected to the transport network or the distribution network.877 The Commission furthermore determined Belgium as the relevant geographical market. It identified the relevant geographical market, based on its assessment of the legal and the regulatory regime, the structure of the market and the price differences between Belgium and neighbouring Member States.878 According to the preliminary assessment, Distrigas had a dominant position in the market related to gas supply for large clients in Belgium.879 With very few exceptions, customers only had one gas supplier; therefore, competition in the gas supply market solely took place when a contract expired and a new contract was concluded. Preliminary Assessment and Decision On 30 June 2005, the Commission adopted the preliminary assessment regarding the gas supply contracts with various customers such as the industrial users, electricity producers and resellers. Given that Distrigas had a dominant position in the Belgian supply market, the Commission expressed concern that access to customers could be foreclosed due to the duration of the contracts and the volumes of gas tied to Distrigas.880 b. c. 876 Ibid., para. 2. 877 Ibid., para. 11. 878 Ibid., para. 12. 879 Ibid., para. 13. 880 Ibid., para. 18. § 9. Decisional Practice (Jurisprudence) in Energy Markets 207 With respect to the duration of the contracts, in Belgium the standard duration of a gas transport contract with the network operator was generally one year. As for the volumes of gas, the contracts between Distrigas and its customers could be generally divided into two categories: – contracts which contained explicit clauses requiring the customer to buy all their gas from Distrigas, and – contracts which contained a fixed annual contractual quantity or an annual minimum quantity.881 The Commission found that some contracts had tacit renewal clauses. In other words, the contract was renewed automatically when it expired, until one of the parties explicitly terminated it. Other contracts did not even have a specific termination date, and the contract remained in force unless one of the parties explicitly terminated it. Thus, the Commission considered both those types of contracts to be of indefinite duration.882 In this case, the Commission took a conservative approach when calculating the level of foreclosure in the market. Since the customers concerned in the relevant markets were industrial buyers and the gas they bought represented a significant part of their overall costs, it was assumed that they would terminate a contract if it was in their economic interest and if they were able to do so. Customers thus were considered to be tied to their contracts until the first opportunity they had to terminate the contract.883 Distrigas offered various commitments to open the Belgian gas market. On 11 October 2007, the Commission decided that the commitments of Distrigas were legally binding.884 Distrigas undertook not to include tacit renewal clause in any new Gas Supply Agreement. The parties agreed that no new contract with industrial users and/or electricity producers would be longer than five years. Moreover, Distrigas undertook not to conclude any gas supply agreements with resellers with 881 Ibid., para. 19. 882 Ibid., para. 22. 883 Ibid. 884 European Commission, Antitrust: Commission opens Belgian gas market to competition, 2007. Part 4 Competition in the European Energy Markets 208 a duration of over two years. In addition, Distrigas committed to ensure that for each calendar year a minimum of 65% and on average for all calendar years a minimum of 70% of the gas volumes to be supplied by itself and related undertakings to industrial users and electricity producers in Belgium would return to the market.885 In other words, only 30% of total volumes sold by Distrigas could be tied to contracts with a duration longer than a year.886 This would allow alternative suppliers to make a competing offer to the customers concerned. EDF Subject Matter The case887 is related to the competition-restricting practices of EDF, the incumbent electricity supplier largely owned by the French State, in the French electricity market. On 18 July 2007, the Commission initiated antitrust proceedings against EDF with the claim that EDF abused its dominant position and thus infringed Article 102 TFEU. The alleged infringement took the form of long-term contracts concluded by EDF with final consumers of electricity in France, in particular large industrial consumers. It was suspected that these contracts prevented customers from switching suppliers, thereby significantly foreclosing the markets concerned.888 Relevant Market and Dominant Position Taking into consideration the previous decisions of the Commission concerning the electricity sector, it can be observed that the Commission divided the relevant market into three groups, based on the retail supply of electricity to end users: 2. a. b. 885 Case COMP/37.966, Distrigas, para. 27. 886 Talus, 2011, p. 155. 887 Case COMP/39.386, EDF (Long Term Electricity Contracts in France), Commission Decision of 17 March 2010. 888 European Commission, Opening of Proceedings, 2007. § 9. Decisional Practice (Jurisprudence) in Energy Markets 209 – the supply of electricity to large industrial and commercial customers, – the supply of electricity to small industrial and commercial customers, and – the supply of electricity to residential customers. Concerning the market for the supply of large industrial and commercial customers, the Commission distinguished customers who have exercised their eligibility and other customers. The relevant market concerned only customers who have exercised their eligibility889. As for the relevant geographical market, the Commission concluded the geographic dimension of the market for the supply of electricity to large industrial customers was national, thus rejecting a wider geographical scope.890 As a result of its investigation, the Commission decided that EDF, which had a near-monopoly of the production, transmission, distribution and supply of electricity in France before liberalisation, held a dominant position in the market for the supply of electricity to large industrial customers in France.891 Preliminary Assessment and Decision According to the preliminary assessment, the Commission took the view that EDF may have abused its dominant position in the relevant market and thus infringed upon Article 102 TFEU by means of: c. 889 In order to differentiate large customers who have exercised their eligibility from smaller customers, the Commission took the view that a distinction should be made on the basis of the volume of consumption and that the relevant market should be limited to the supply of large customers for sites with an annual consumption of 7 GWh or more. Case COMP/39.386, EDF, para. 19. 890 Ibid., para. 23. The Commission’s decision regarding the relevant geographical market was in line with its previous decision-making practice. See, for example, COMP/M.4180, GDF/SUEZ, Commission Decision of 14 November 2006, para. 169; COMP/M.3883, GDF/Centrica/SPE, Commission Decision of 7 September 2005; COMP/M.3318, ECS/Sibelga, Commission Decision of 19 December 2003, para. 8; COMP/M.3075 – 3080, ECS/Intercommunales, Commission Decision of 13 February 2003, para. 7; COMP/M.2857, M.Ecs/IEH, Commission Decision of 23 December 2002, para. 5. 891 Case COMP/39.386, EDF, para. 25. Part 4 Competition in the European Energy Markets 210 – concluding contracts with large industrial customers which foreclosed the market of electricity supply to large industrial customers both to undertakings wishing to operate as principal suppliers or as secondary suppliers in France, due to their scope, duration and nature of the contracts, and – imposing resale restrictions in its contracts for the supply of electricity to large industrial customers in France. The Commission found that contracts concluded by EDF with industrial customers made it more difficult for alternative suppliers enter into the French market and to acquire EDF’s customers. Consequently, customers were not able to switch suppliers, which led to market foreclosure.892 The vast majority of EDF contracts indeed contained restrictive clauses either explicitly requiring the customers to exclusively source their electricity from EDF (de jure exclusivity) or through the application of a set of clauses having the same effect, thereby creating strong incentives for customers to source their electricity exclusively from EDF (de facto exclusivity).893 Moreover, the Commission stated that EDF imposed clauses in its supply contracts that restricted the resale of electricity by large industrial customers. According to the Commission, these clauses restricting the use of electricity by the customer were widespread and had been so for a number of years.894 EDF submitted commitments addressing the Commission concerns, and on 17 March 2010 the Commission decided that the commitments of EDF were legally binding. Within the scope of those commitments, EDF undertook that, as of 1 January 2010, for each calendar year during which the commitments apply at least 60%, and on average for all the calendar years during which the commitments apply at least 65%, of the electricity supplied to large industrial customers, either directly or through a buying group, would be returned to the market.895 Moreover, EDF pledged that the maximum duration of new contracts for the supply of electricity to large industrial customers 892 Ibid., para. 31. 893 Ibid., para. 32. 894 Ibid., para. 36. 895 Ibid., para. 43. § 9. Decisional Practice (Jurisprudence) in Energy Markets 211 would not exceed five years and that EDF would offer two alternative types of contract, one of which will effectively allow the customer to contract for additional supplies with another supplier of its choice.896 As for the restricting clauses, EDF undertook to cease restricting the resale of volumes of electricity bought from it by large industrial customers.897 Summary While the RWE, ENI, ČEZ, GDF Suez and E.ON cases dealt with the competition-restrictive conduct of undertakings dominant in their relevant markets which led to the foreclosure of access to their gas transmission networks, the Distrigas and EDF cases concerned anticompetitive practices by which energy incumbents essentially tried to keep their customer base for themselves through supply contracts with an extremely long-duration (customer foreclosure).898 Long-term supply contracts are bilateral energy exchange agreements between a seller and an end customer that are characterised by long-term commitments with exclusive purchasing obligations or exclusive supply obligations. These long-term contracts aim at binding the customer as long as possible, as a result of which switching the provider or market participation by third-party supplier becomes impossible. These long-term supply contracts (so-called downstream supply contracts) are to be used to delimit the long-term gas import contracts (so-called upstream supply contracts) concluded between the natural gas producer (e.g. Gazprom) and the regional gas companies (e.g. E.ON Ruhrgas). These gas import contracts are also characterised by take-or-pay clauses and long-term ties.899 Such long-term gas import contracts have so far been considered a necessary component of EU security of supply. Due to the increasing flexibility that LNG, spot markets and other unconventional opportunities for gas production 3. 896 Ibid., para. 45–46. 897 Ibid., para. 49. 898 Koch & Gauer, 2011, p. 228. 899 Through long-term contracts, the buyer, in many cases the national energy supply monopoly, could secure the national energy supply in the medium and long-term and make investment decisions based on predictable transportation needs. Talus, 2011, p. 277; Hofmann, 2013, pp. 252–253. Part 4 Competition in the European Energy Markets 212 (e.g. shale gas) provide, this traditional structure is currently undergoing a transformation.900 The Commission set out its antitrust policy regarding long-term energy supply contracts in its Distrigas and EDF decisions. Distrigas was the first decision by which the Commission pursued long-term gas supply contracts under Article 102 TFEU. The Distrigas decision established a system for long-term supply contracts, also known as the Distrigas model. With the EDF decision, this model was transferred equally to the electricity sector. Long-term energy supply contracts between suppliers and large industrial consumers are not prohibited by EU competition rules per se.901 On the contrary, each case must be assessed on its merits.902 In order to determine whether long-term contracts foreclose markets, the following five criteria must be taken into account903: – the market position of the supplier; – the share of the customer’s demand tied under the contract; – the duration of the contracts; – the overall share of the market covered by contracts containing such ties; – efficiencies. The Commission concluded that Distrigas and EDF both clearly held a dominant position on the relevant supply markets and might have abused their dominant position under Article 102 TFEU, because their long-term and/or exclusive supply contracts prevented customers from switching, which led to a restriction of the scope for other gas suppliers to conclude contracts with customers and so foreclosed their access to the market. It should be noted that the Commission did not refer to a possible infringement of Article 101 TFEU in its decision, unlike the Bundeskartellamt.904 In its E.ON decision, the Bundeskartellamt con- 900 Talus, 2011, p. 263. 901 Hofmann, 2013, pp. 254. 902 Spanjer, 2009, p. 199. 903 European Commission, Antitrust: Commission increases competition in the Belgian gas market – frequently asked questions, 2007; Hauteclocque, 2009, p. 98. 904 Koch & Gauer, 2011, p. 229. § 9. Decisional Practice (Jurisprudence) in Energy Markets 213 sidered that a long-term supply contract can be an anticompetitive (vertical) agreement in violation of Article 101 TFEU.905 Exclusionary Abuses (Destination Clauses) BEH Subject Matter The case906 is related to the infringement of Article 102 TFEU through the abuse of a dominant position in the Bulgarian wholesale electricity market and concerns territorial restrictions incorporated in supply agreements entered into by Bulgarian Energy Holding’s (BEH) subsidiaries in the electricity wholesale market in Bulgaria. BEH is a vertically integrated energy company owned by the Bulgarian State. BEH’s activities include the acquisition, sale and participation in the management of companies active in the upstream markets (e.g., generation, production) and downstream markets (e.g., transmission, distribution, transit, storage) as well as the sale and purchase of electricity, natural gas, coal and other types of raw materials used for the production of electricity. The Commission had opened the investigation against BEH in late 2012, accusing the company of abusing its dominant position in the Bulgarian wholesale electricity market. The Commission was concerned that competition in the wholesale electricity markets in Bulgaria and neighbouring Member States might be restricted due to territorial restrictions included in the supply agreements by BEH.907 Relevant Market and Dominant Position Concerning the relevant product market, the Commission distinguished between the wholesale supply of electricity at regulated prices and the wholesale supply of electricity at freely negotiated prices in the preliminary assessment. According to the Commission, in this case the C. 1. a. b. 905 Bundeskartellamt, E.ON Ruhrgas, Decision of 13 January 2006, B8–113/03–01. 906 Case AT.39.767, BEH Electricity, Commission Decision of 10 December 2015. 907 European Commission, Antitrust: Commission opens proceedings against Bulgarian Energy Holding, 2012. Part 4 Competition in the European Energy Markets 214 relevant product market is the market for the wholesale supply of electricity at freely negotiated prices.908 In the preliminary assessment, the Commission provisionally concluded that BEH holds a dominant position in the market for the wholesale supply of electricity at freely negotiated prices in Bulgaria. Preliminary Assessment and Decision According to the preliminary assessment, BEH was abusing its dominant position in the free wholesale market for the supply of electricity in Bulgaria by way of destination clauses in the contracts entered into by BEH’s subsidiaries for the wholesale supply of electricity at freely negotiated prices to entities other than end users.909 The territorial restriction clauses reduced the possibility of independent customers purchasing electricity from production subsidiaries of BEH to resell it to customers outside Bulgaria. The clauses could therefore lead to an increase in trade barriers between Bulgaria and other Member States, which would distort the allocation of electricity within the common market and adversely affect the liquidity and efficiency of its electricity markets.910 The Commission took the preliminary view that, as a result of the territorial restrictions, purchasers of electricity are deprived of the possibility to organise the trading of electricity in the wholesale market for the supply of electricity at freely negotiated prices in accordance with their own and their customers’ demand.911 Moreover, the Commission highlighted that the territorial restrictions impede trade in electricity between Bulgaria and other Member States and hinder the development of a wider regional wholesale market within the European Union.912 On 10 December 2015, the Commission accepted the commitments offered by the BEH to resolve competition concerns in the wholesale electricity markets in Bulgaria. Firstly, BEH and BEH’s subsidiaries undertook not to include destination clauses or any measure of equivac. 908 Case AT.39.767, BEH Electricity, para. 33–35. 909 Ibid., para. 49. 910 Subiotto et al., 2016, p. 289. 911 Case AT 39.767, BEH Electricity, para. 65. 912 Ibid., para. 67. § 9. Decisional Practice (Jurisprudence) in Energy Markets 215 lent effect in their contracts for the sale of electricity on the market for the wholesale supply of electricity at freely negotiated prices.913 Secondly, BEH committed to set up an independent and liquid power exchange in Bulgaria through which electricity can be traded anonymously, with no possibility of checking where it is resold. Thirdly, BEH committed to offer certain volumes of electricity on an independently operated day-ahead market on a newly created power exchange in Bulgaria.914 A novelty of this case is that the commitments offered by BEH envisage the creation of new market infrastructure rather than the provision of access to existing assets.915 Gazprom Subject Matter The case916 is related to the infringement of EU antitrust rules by pursuing an overall strategy to partition gas markets along national borders in eight Member States (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia). The Commission opened formal proceedings to investigate accusing Gazprom of hindering competition in the Central and Eastern European gas markets. It was concerned that Gazprom might be abusing its dominant position in the upstream gas supply markets in the Central and Eastern European Member States and therefore might infringe Article 102 TFEU. Gazprom is an open joint stock company founded in 1993 to take over the State Gas Group Gazprom. Its major business activities are geological exploration, production, transportation, storage, processing and marketing of gas. The Russian State owns a 50.23% controlling stake in Gazprom. 2. a. 913 Ibid., para. 76. 914 European Commission, Antitrust: Commission accepts commitments by Bulgarian Energy Holding to open up Bulgarian wholesale electricity market, 2015. 915 Ibid., p. 290. 916 Case AT 39.816, Gazprom – Upstream gas supplies in Central and Eastern Europe, Commission Decision of 24 May 2018. Part 4 Competition in the European Energy Markets 216 The Commission’s investigation focused on three alleged anticompetitive practices: – hindering cross-border gas sales through destination and export ban clause, – unfair pricing policy, and – preventing the diversification of the supply of gas.917 Relevant Market and Dominant Position The Commission divided the wholesale supply market into the upstream and the downstream wholesale market. It considered that the relevant product market is the market for the upstream wholesale supply of natural gas by producers and exporters to importers and wholesalers.918 The Commission preliminarily concluded that Gazprom is dominant in all five Central and Eastern European markets919 for the upstream wholesale supply of gas.920 Preliminary Assessment and Decision According to the Commission’s preliminary assessment, Gazprom may have infringed EU competition law by pursuing an overall strategy to divide Central and Eastern European gas markets through reducing its customers’ ability to resell the gas cross-border. This strategy allowed Gazprom to charge unfair prices in certain Member States. Moreover, by making the supply of gas and gas prices dependent on obtaining unrelated gas transport infrastructure commitments from wholesalers, Gazprom might have abused its dominant position in the wholesale gas supply market.921 b. c. 917 European Commission, Antitrust: Commission sends Statement of Objections to Gazprom for alleged abuse of dominance on Central and Eastern European gas supply markets, 2015. 918 Case AT 39.816, Gazprom, para. 3. 919 Bulgaria, Czech Republic, Estonia, Lithuania and Slovakia. 920 Case AT 39.816, Gazprom, para. 34. 921 European Commission, Antitrust: Commission sends Statement of Objections to Gazprom for alleged abuse of dominance on Central and Eastern European gas supply markets, 2015. § 9. Decisional Practice (Jurisprudence) in Energy Markets 217 On 22 April 2015, the Commission sent a statement of objections to Gazprom alleging that Gazprom infringed Article 102 TFEU through some of its business practices in the Central and Eastern European gas markets.922 The Commission accused Gazprom of abusing its dominant position by imposing territorial restrictions in its supply agreements with gas wholesalers. These territorial restrictions include: – export ban clauses (which explicitly prohibit the export of gas), – destination clauses (which stipulate that the customer [wholesaler or industrial customer] must use the purchased gas in its own country or can only sell it to certain customers within its country) and – other measures preventing the cross-border flow of gas923. In addition, according to the Commission’s preliminary findings, these territorial restrictions allowed Gazprom to pursue an unfair pricing policy in five Eastern EU Member States by charging prices to wholesalers that are significantly higher compared to Gazprom’s costs or to benchmark prices.924 Furthermore, the Commission was concerned that Gazprom leveraged its market dominance in Bulgaria and Poland by making gas supplies conditional upon obtaining certain infrastructure-related commitments from wholesalers.925 In its preliminary assessment, the Commission highlighted that a contract imposing on the purchaser a territorial restriction in the form of an export restriction or a restriction regarding the territory into which goods can be resold may be regarded as a restriction of competition.926 As mentioned in the BEH decision, the list of abusive practices set out in Article 102 TFEU is not exhaustive. Any practice that leads to a segmentation of the internal market (market partitioning) can be seen as 922 Case AT 39.816, Gazprom, para. 34. 923 Ugarte & Di Masi, 2016, p. 22. 924 European Commission, Antitrust: Commission sends Statement of Objections to Gazprom for alleged abuse of dominance on Central and Eastern European gas supply markets, 2015. 925 Ibid. 926 Case AT 39.816, Gazprom – Upstream gas supplies in Central and Eastern Europe, Statement of Objections, para. 823. Part 4 Competition in the European Energy Markets 218 infringement of EU competition rules by the CJ.927 According to the Commission, a contract clause restricts competition if such a measure – by artificially altering the conditions of competition – is obviously capable of inducing traders to prioritise to the national market over exports, thereby giving rise to a segregation928 of the internal market in contrast to the economic interpenetration desired by the Treaty.929 The Commission concluded that Gazprom might have infringed Article 102 TFEU based on the above-mentioned reasons930 and recalled that, for the purpose of proving an abuse of a dominant position within the meaning of Article 102 TFEU, it is sufficient to show that the abusive conduct tends to restrict competition or that the conduct is capable of having that effect.931 Even though Gazprom did not agree with the Commission’s preliminary view, it offered the following commitments: – Removal of territorial restrictions and measures of an effect equivalent to such restrictions to the free flow of gas: Gazprom committed not to apply and not to introduce any contractual provisions in its gas supply contracts that may, directly or indirectly, prohibit, restrict or make economically less attractive the customers’ ability to re-export or resell gas. – Establishing a structured process to ensure competitive gas prices: Gazprom committed to extend the scope of the price revision clause by offering this clause also to new customers and by covering contracts with a total duration of at least three years (instead of four years).932 Relevant Gazprom customers are given an effective tool to make sure their gas price reflects the price level in competitive Western European gas markets, especially at liquid gas hubs. 927 Even though market partitioning cases have mainly been assessed under Article 101 TFEU so far, the Commission in this case applied Article 102. Case AT 39.816, Gazprom, Statement of Objections, para. 834. 928 The division of something into sections or categories. 929 Case AT 39.816, Gazprom, Statement of Objections, para. 838. 930 Ibid., para. 1238. 931 Ibid., para. 841. 932 Ibid., para. 153. § 9. Decisional Practice (Jurisprudence) in Energy Markets 219 – No leveraging of dominance in gas supply933: Gazprom cannot act on any advantages concerning gas infrastructure which it may have obtained from customers by having leveraged its market position in gas supply. – Facilitating gas flows to and from isolated markets: Gazprom will enable gas flows to and from parts of Central and Eastern Europe that are still isolated from other Member States due to the lack of interconnectors, namely the Baltic States and Bulgaria.934 On 24 May 2018, the Commission adopted a decision making the commitments legally binding on Gazprom after reviewing comments of all stakeholders. According to the Commission’s view, the commitments offered by Gazprom have addressed all substantiated concerns in respect of territorial restrictions, prices and infrastructure. The Commission stated that the commitments would contribute to improving the competitiveness and liquidity of the gas markets in the Central and Eastern European countries covered by the investigation.935 Summary The first step to creating an internal EU energy market is to remove the major barriers to cross-border energy trade. However, destination clauses and territorial sales restriction clauses, traditionally inserted in longterm upstream gas supply contracts, restrict the territorial area in which gas can be resold by buyers. These clauses involve two different restrictions: – prohibiting the buyer from reselling the gas into other countries or other areas than those for which it is intended; 3. 933 The Commission was concerned that Gazprom leveraged its dominant market position on the gas supply market to obtain advantages with regard to the access to or control of gas infrastructure. European Commission, Antitrust: Commission imposes binding obligations on Gazprom to enable free flow of gas at competitive prices in Central and Eastern European gas markets, 2018. 934 Ibid. 935 No fines for Gazprom’s monopolistic practices in Central Europe?, 2017, https:// www.osw.waw.pl (accessed: 1 June 2019). Part 4 Competition in the European Energy Markets 220 – preventing a buyer from reselling gas to other customers in the same geographic area.936 While allowing for differentiated price setting by giving large gas producers the possibility to sell gas to different buyers at different prices and conditions at the same delivery point, these clauses limit the freedom of the buyer to resell the gas, thus reducing liquidity in the market. The basis of these clauses is the horizontal and vertical segmentation of the EU energy markets. Traditionally, large producers sold the gas indirectly to end customers through national incumbent suppliers within the area where these incumbents controlled the pipelines as well. These areas were typically the vertically integrated incumbent supplier’s immediate home state. These clauses enable suppliers to maintain different price areas for the same product, as they reduce the opportunities of the buyers to resell the gas outside a specific geographic area. Moreover, they also decrease liquidity in the energy markets, making it easier to identify individual transactions and facilitating collusion between market players. Due to the above-mentioned effects in the markets, EU competition law prohibits destination and territorial sales restriction clauses.937 The Commission has traditionally reviewed destination clauses within the meaning of Article 101 TFEU.938 In its GDF/ENI Decision939, the Commission concluded that the destination clause in the gas transport agreement between GDF and ENI was a restriction of competition and consequently an infringement of Article 101 TFEU on the grounds that it prevented ENI from selling in France the gas that was being 936 Stern, 2005, p. 133. 937 Talus, 2011, p. 159; Murphy, 2014, p. 47. 938 According to Regulation 330/2010 (on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices), restrictions of the territory into which a buyer may sell the contracted goods were considered to be a restriction under Article 101 TFEU that remove the benefit of the block exemption. Moreover, it is clear from previous judgments of the CJ that clauses that restrict the buyer’s freedom to use the supplied goods in accordance with his own economic interests or restrict the territory into which goods can be resold may be regarded as a restriction on competition, within the meaning of Article 101 TFEU. Case C-319/82 Société de vente de ciments et béton de l’Est SA v Kerpen & Kerpen GmbH und Co. KG, [1983] ECR 04173, para. 6; Subiotto et al., 2016, p. 289. 939 Case COMP/38.662, GDF/ENI, Commission Decision of 26 October 2004; Case COMP/38.662, GDF/ENEL, Commission Decision of 26 October 2004. § 9. Decisional Practice (Jurisprudence) in Energy Markets 221 transported through France, which precluded customers in France from purchasing that gas.940 Moreover, the clause caused isolation of the French market, which is incompatible with the creation of an integrated European gas market.941 However, for the first time the Commission used Article 102 to investigate these territorial restrictions in the BEH and Gazprom cases. In its BEH decision, even though the practices that were the subject of the Commission’s concerns were set out in the contracts that the BEH’s subsidiaries entered into with purchasers, the Commission decided to assess these practices under Article 102 TFEU. According to the preliminary assessment of the Commission, its dominant position on the relevant market allowed BEH to impose such conditions on its purchasers. Similarly, in the Gazprom Case, the Commission noted that the fact that an agreement may fall within Article 101 TFEU does not preclude the application of Article 102 TFEU, since this latter Article is “expressly aimed in fact at situations which clearly originate in contractual relations”.942 Admittedly the Commission did not fit the case within one of the established categories of abuse under Article 102 TFEU.943 However, while Article 102 TFEU does not explicitly refer to the imposition of restrictions regarding destination, the list of abusive practices set out in Article 102 TFEU is not exhaustive. 940 However, according to the settled case-law of the Court of Justice of the European Communities, clauses which restrict the freedom of one of the parties to use the delivered goods in accordance with his own economic interests constitute restrictions of competition within the meaning of Article 81 of the Treaty. In particular, ruling on export bans, the Court ruled that a clause of this kind “by its very nature […] constitutes a restriction of competition […], the objective of which the contractors have agreed to try to isolate part of the contract”. Case COMP/38.662, GDF/ENI, para. 67. 941 Ibid., para. 69. 942 Case AT 39.816, Gazprom – Upstream gas supplies in Central and Eastern Europe, para. 832. 943 Subiotto et al., 2016, p. 290. Part 4 Competition in the European Energy Markets 222 Exploitative Abuses E.ON Electricity Subject Matter The case944 is related to the competition-restricting conduct of E.ON AG and its subsidiaries, E.ON Ruhrgas AG and E.ON Gastransport GmbH, in the German gas supply and transmission markets. Believing that E.ON infringed upon EU competition law, the Commission carried out an unannounced inspection at the premises of E.ON on 12 December 2006.945 The Commission required E.ON to submit very extensive data from the undertakings concerned to establish whether some capacity had effectively not been offered on the short-term market.946 Based on the information it obtained during the inspections, the Commission opened two antitrust proceedings against E.ON in 2008. Under the first case, the Commission was concerned that E.ON abused its dominant position by withholding available generation capacity offered on the short-term market with a view to raising the price above competitive levels in the German electricity wholesale market. The second case was related to the German electricity balancing market947. The Commission had expressed concern that E.ON might have granted preferential treatment to its generation affiliate in the access to the German electricity transmission network by purchasing secondary balancing power rather than tertiary balancing power.948 D. 1. a. 944 Case COMP/39.388, E.ON, Commission Decision of 26 November 2008; Case COMP/39.389, E.ON, Commission Decision of 26 November 2008. 945 Case COMP/39.388 & Case COMP/39.389, E.ON, para. 41; European Commission, Competition: Commission has carried out inspections in the German electricity sector, 2006. 946 Chauve, 2009, p. 52. 947 According to the ENTSO-E Network Code on Electricity Balancing, the balancing market is “the entirety of institutional, commercial and operational arrangements that establish market-based management of the function of Balancing”, while “Balancing” being defined as “all actions and processes, on all timelines, through which TSOs ensure, in a continuous way, to maintain the system frequency within a predefined stability range”. 948 Tapia & Mantzari, 2013, p. 616. § 9. Decisional Practice (Jurisprudence) in Energy Markets 223 Relevant Market and Dominant Position Under the first case, the relevant product market was considered to be the wholesale market for electricity (imports and the generation of electricity for further resale)949, and the geographic market was considered to be the territory of Germany.950 In its preliminary assessment, the Commission found that E.ON, RWE and Vattenfall collectively dominated the German wholesale electricity market. The Commission took a view that the specific characteristics of the electricity sector may allow each of the largest power generators within the same market to be individually dominant even with limited market presence.951 Under the second case, the relevant product market was the market for the demand of secondary balancing power (secondary balancing reserves).952 The geographically relevant market was the network area of each transmission system operator.953 Concerning the dominant position, the Commission concluded that E.ON held a dominant position within the meaning of Article 102 TFEU on the market for the demand of secondary balancing reserves in the E.ON network area, where the TSO (E.ON Netz, a subsidiary of E.ON) acted as a monopsonist954.955 Preliminary Assessment and Decision The Commission provisionally concluded that E.ON might have infringed Article 102 TFEU in two ways. Firstly, E.ON might have abused its dominant position on the German electricity wholesale b. c. 949 Case COMP/39.388 & Case COMP/39.389, E.ON, para. 11. 950 Ibid., para. 12. 951 In the market test, the Commission received a submission stating that Vattenfall should not be considered part of the collectively dominant group of undertakings. Therefore, the question was left open whether RWE, E.ON and Vattenfall are to be considered collectively dominant as described in the preliminary assessment or whether only RWE and E.ON are to be considered collectively dominant. Under both alternatives E.ON would be considered part of the collective dominant position. Case COMP/39.386, E.ON, paras. 13–24. 952 Case COMP/39.388 & Case COMP/39.389, E.ON, para. 46. 953 Ibid., para. 47. 954 One who is a single buyer of a product or service offered by many sellers. 955 Case COMP/39.388 & Case COMP/39.389, E.ON, para. 48. Part 4 Competition in the European Energy Markets 224 market as a wholesaler in the electricity market by developing a strategy to withdraw available generation capacity with the aim to raising electricity prices to the detriment of consumers.956 In addition, the Commission was concerned that E.ON might have complemented this with a medium and long-term strategy of hindering actual or potential competitors from entering the generation market and thereby limiting the market volume in electricity generation.957 Secondly, according to Article 102 TFEU E.ON might have abused its dominant position as a transmission system operator on the market for the demand of secondary balancing reserves958 in the E.ON network area by increasing its own costs with a view to favouring its production affiliate and passing the costs on to the final consumer, on the one hand, and by preventing power producers from other Member States from exporting balancing energy into the E.ON balancing market, on the other hand.959 E.ON proposed very far reaching commitments to address the Commission’s concerns in both cases960: – In order to remedy the Commission’s concerns on the wholesale electricity market, E.ON offered to divest significant volume of generation capacity (around 5000 MW, about 20% of E.ON’s German generation portfolio) in Germany from different types of technology and fuels, i.e., run-off-river, lignite, hard coal, gas, pump storage and nuclear, to independent competitors.961 – In order to address the Commission’s concerns on the electricity balancing markets, E.ON offered to divest its entire transmission system business consisting of its Extra-High-Voltage (380/220 kV) line network and the system operations run by E.ON Netz. The High-Voltage (110 kV) line network, which was also operated by 956 Ibid., para. 26. 957 Ibid., para. 41. 958 Balancing energy is last-minute energy necessary to maintain the frequency of the current in the grid. 959 European Commission, Antitrust: Commission market tests commitments proposed by E.ON concerning German electricity markets, 2008. 960 Koch & Gauer, 2011, p. 235. 961 European Commission, Antitrust: Commission opens German electricity market to competition, 2008. § 9. Decisional Practice (Jurisprudence) in Energy Markets 225 E.ON Netz, would remain with E.ON under this commitment proposal. The Commission decided that the commitments offered by E.ON were sufficient to meet the competition concerns expressed in the preliminary assessment. Following this decision of 26 November 2008, for the first time in the history of European antitrust law a company sold significant assets to eliminate competition concerns. Both commitments were major structural interventions in the form of ownership unbundling.962 Swedish Interconnectors Subject Matter The case963 is related to the curtailment of export transmission capacity for electricity964 by Svenska kraftnät (SvK) to address internal congestion since at least 2002.965 SvK is an authority that is operated in the form of a state-owned undertaking. It is designated as a TSO by Sweden for its national electricity system966 and is responsible for maintaining, operating and developing the national high-voltage electricity grid including all the state-owned interconnectors with neighbouring countries. After Dansk Energi967 submitted a complaint to the Commission in July 2006 concerning an alleged restriction of transmission capacity on the Öresund interconnector linking Southern Sweden and Eastern Denmark by SvK, the Commission opened proceedings with the abuse claim against SvK on 1 April 2009. The Commission suspected that SvK had abused its dominant position in the Swedish electricity transmission market by strategically 2. a. 962 Hofmann, 2013, p. 317. 963 Case COMP/39.351, Swedish Interconnectors, Commission Decision of 14 April 2010. 964 The curtailment of export transmission capacity means that domestically generated or imported electricity is reserved for domestic consumption contrary to the objective of creating an internal market for electricity. Mäntysaari, 2015, p. 131. 965 Case COMP/39.351, Swedish Interconnectors, para. 1. 966 Ibid., para. 3. 967 Dansk Energi is a non-commercial lobby organisation for Danish energy companies operating in Denmark. Part 4 Competition in the European Energy Markets 226 limiting the amount of export transmission capacity available on electricity interconnectors situated along Sweden’s borders from January 2002 to April 2008 with the objective of relieving internal congestion on its network.968 Reserving domestically produced electricity for only domestic consumption resulted in favouring consumers in Sweden over consumers in neighbouring EU or EEA Member States.969 Relevant Market and Dominant Position The relevant market was considered to be the 220–400 kv transmission grid including the interconnectors connected to it.970 As a relevant geographic market, the Commission applied the territory of Sweden. According to the preliminary assessment, the Commission concluded that SvK held a dominant position within the meaning of Article 102 TFEU on the Swedish electricity transmission market.971 Preliminary Assessment and Decision According to the preliminary assessment, the Commission had concerns that SvK might have infringed Article 102 TFEU through abusing its dominant position on the Swedish electricity transmission market by curtailing the amount of export capacity on the Öresund interconnector linking Southern Sweden and Eastern Denmark when it anticipated internal congestion problems on the national transmission system. It reserved domestically produced electricity for only domestic consumption and thereby discriminated between different network users. The Commission found that SvK artificially segmented the domestic market and thereby prevented industrial and other users located outside Sweden b. c. 968 European Commission Antitrust: Commission opens proceedings against Swedish Electricity Transmission System Operator concerning limiting interconnector capacity for electricity exports, 2009. 969 Akman, 2015, p. 233. 970 Case COMP/39.351, Swedish Interconnectors, para. 16. 971 Ibid., para. 24. The dominant position of SvK in the relevant market was self-evident. SvK was a monopoly, as the Swedish State granted an exclusive concession to SvK to operate the electricity transmission network. Therefore, it held a dominant position on the electricity transmission network in Sweden. Hauteclocque & Hancher, 2011, p. 21. § 9. Decisional Practice (Jurisprudence) in Energy Markets 227 to benefit from the internal market by treating requests for transmission for the purpose of consumption within Sweden differently from requests for transmission for the purpose of export.972 SvK had several different bottlenecks in its network, especially at the cross-border points where demand for transmission capacity exceeds network capacity. Sweden exports electricity to the continent to satisfy demand in the south, while in the north it imports electricity from Norway since there is cheap hydro power often in excess of demand in Norway. According to the assessment, the lines in one or more of the bottlenecks, but particularly in the North, could not accommodate North-South flows of electricity in or into Sweden. Because of the lack of network capacity, congestion often occurred in the Swedish electricity network973 and SvK needed to manage this congestion.974 While these bottlenecks could be remedied in the long term by expanding network capacities, in the short term there were three types of measures which could be adopted by SvK to relieve internal network congestion975: – Market splitting: to split the Swedish market into separate price zones on both sides of the bottleneck and hence give price signals to increase production and decrease consumption in the higherpriced side of the bottleneck. – Congestion shifting: to curtail available transmission capacity for trade with another zone in order to relieve the anticipated congestion on the bottleneck within its network. – Countertrading: to pay individual generators on both sides of the bottleneck to change their planned production (or consumption), which effectively reduces the transmission flow on the bottleneck, or to pay large energy consumers to change their consumption patterns. 972 Case COMP/39.351, Swedish Interconnectors, para. 27. Internal demand was satisfied whenever capacity was available, whereas external demand was refused despite availability during a substantial number of hours during the year. Hauteclocque & Hancher, 2011, p. 21. 973 Sadowska & Willems, 2012, p. 1. 974 Case COMP/39.351, Swedish Interconnectors, para. 36. 975 Ibid., para. 37. Sadowska & Willems, 2012, p. 3. Part 4 Competition in the European Energy Markets 228 SvK chose the third option and curtailed the export capacity on several interconnectors during a significant number of hours in the period January 2002 to April 2008.976 The Commission subsequently found that average prices in the neighbouring countries were significantly higher than prices in Sweden due to capacity limitation and congestion on the interconnectors.977 The prices had been lower when more capacity had been available for the transfer between Sweden and the control areas. The Commission therefore considered that SvK’s behaviour of artificially restricting the capacity of interconnectors led, de facto, to discrimination between the customers in Sweden, on one side, and customers in Member States and contracting parties to the EEA Agreement importing electricity from Sweden, on the other side.978 In view of such discrimination, the Commission considered that Article 102 TFEU had been infringed. As mentioned above, SvK’s behaviour contributed to the segmentation of the markets, which was incompatible with the European internal market. On 4 September 2009, SvK proposed commitments to address the Commission’s concerns. It primarily committed to subdivide the Swedish transmission system into two or more bidding zones979.980 SvK offered the commitment to manage internal congestion in the Swedish transmission network through countertrade until the bidding zones become operative, as it can be cheaper to make the necessary adjustments in Sweden than in neighbouring countries. With this commitment it was intended to reduce the limitation of capacity on the interconnectors.981 On 14 April 2010, the Commission decided that the commitments of SvK were legally binding. 976 Case COMP/39.351, Swedish Interconnectors, para. 38. 977 Ibid., para. 41. 978 Ibid., para. 42. 979 A bidding zone is the largest geographical area within which market participants are able to exchange energy without capacity allocation. 980 Case COMP/39.351, Swedish Interconnectors, para. 47. 981 European Commission, Antitrust: Commission market tests commitments proposed by Svenska Kraftnät concerning Swedish electricity transmission market, 2009. § 9. Decisional Practice (Jurisprudence) in Energy Markets 229 Summary Capacity withdrawal The E.ON case addressed an alleged strategy by E.ON to withdraw available generation capacity with the intention of increasing electricity wholesale prices to the detriment of consumers. The distortion of competition through capacity withdrawal was based on the economic concept of the so-called “merit-order”982, which explains the price setting mechanism on short term electricity markets.983 Since electricity cannot be stored, it is always necessary to produce just enough electricity to meet demand. Fluctuations in electricity demand can be regulated by turning power plants on and off. Thus, on the one hand, it is sufficient, e.g., to run on low demand the most cost-effective power plants (e.g., hydropower and nuclear power). In the case of greater demand, on the other hand, more cost-intensive power plants (e.g., coal or gas) must be switched on and added to the grid. On the electricity exchange, the electricity price is based on the short-term market after the last power plant needed to meet the demand (marginal power plant). If, as the E.ON decision suggests, more cost-effective power plants are shut down, more costly power plants have to be added. This results in an increase in electricity prices. The losses suffered by the withdrawn capacity are compensated by additional profits through higher contribution margins. The electricity price is thus driven up by manipulation of the supply of products.984 Some specific features of the electricity markets make them particularly vulnerable to manipulations by capacity withdrawal: As the production costs between different power plant types (e.g., gas and nuclear plant) differ significantly, the cost curve is quite steep on its right 3. a. 982 According to the merit order concept, prices are set by the (short-run) marginal cost of the plant producing the last unit of electricity required to meet demand. The last unit (“marginal unit”) needed to meet the demand at a given moment is the one with the highest marginal costs of the units running at a given point in time. It follows from this concept that the costs of the “price setting” power plant also determine the revenues of all other power plants from other producers called to produce in any given hour. Koch & Gauer, 2011, p. 232. 983 Due to the dramatic price increasing effect of such behaviour, this abuse form can be particularly harmful for energy customers. Ibid. 984 Hofmann, 2013, p. 308. Part 4 Competition in the European Energy Markets 230 side. Due to the fact that electricity demand is almost inelastic and that electricity cannot be stored, withdrawing some of the generation almost automatically raises the price in the (short-term) electricity market. The costs of the withdrawal (foregone profits of the unsold generation) are usually compensated by significantly increased profits of all the generation which continues to be produced.985 Capacity withdrawal should not be confused with capacity hoarding – subversion of the refusal to supply – in which the network operators provide less network capacity than could be available. The E.ON case is about the production capacity which is held back by the energy producer in the electricity wholesale market in order to increase the electricity price. The Commission found evidence that E.ON might indeed have pursued a strategy to withdraw available generation capacity on the German short-term market in order to raise prices between 2002 and 2007. It should be noted that a “short-term” withholding strategy in hours of high demand is also likely to have an effect on the long-term wholesale market, as prices on the long-term market are driven by the corresponding trend in short-term prices. The withholding strategy may therefore not only increase prices on the short-term market but cause buyers to buy also long-term (“forward”) products at higher prices. Purchase of overpriced balancing energy The second E.ON Electricity case concerned an alleged abuse on the balancing markets. Due to non-storability of electricity, such balancing or control by the transmission system operator of the respective balancing zone is necessary to compensate for unexpected fluctuations in the network in the short term. In order to ensure system stability and maintain the appropriate tension level in their grids, the TSO needs balancing energy. There are three types of control/balance energy: primary, secondary and tertiary balancing energy986. The Commission b. 985 Koch & Gauer, 2011, p. 232. 986 Primary balancing energy has to be available within seconds; secondary and tertiary balancing energy kick in after longer periods (usually after 15 seconds and 15 minutes, respectively). § 9. Decisional Practice (Jurisprudence) in Energy Markets 231 discovered evidence indicating that E.ON’s TSO accounted for almost all purchases of balancing energy within its grid area and that the main seller of such energy was E.ON’s generation branch (E.ON Supply & Trading). While E.ON Supply & Trading hold a strong position in the secondary balancing energy market, the tertiary balancing energy market was more competitive. The Commission found that E.ON Netz might have systematically bought secondary reserves from E.ON Supply & Trading instead of procuring cheaper tertiary reserves from other national or foreign generators. By favouring its own production affiliate, E.ON might have artificially increased costs for the TSO and, ultimately, for the final consumer.987 The E.ON wholesale case concerned an alleged strategy by E.ON to withdraw available generation capacity (limiting the production of certain power plants) with an aim to increase electricity wholesale prices. With regard to the overpriced balancing energy, the Commission remains vague in its subsumption and, in this case, refers only in general to Article 102 TFEU. According to Koch & Gauer988, as both, capacity withdrawal and purchase of overpriced balancing energy, are not directed against competitors but directly effects customer prices (and, accordingly, E.ON’s revenues), it would be appropriate to consider such conducts as exploitative abuses under Article 102 (2)(a) TFEU (“unfair selling prices”). Even though, the Commission did not set out in detail the reasons for its judgement on the “unfairness” of the prices, and despite the fact that it is difficult to establish the “benchmark” between fair and unfair prices, the Commission’s decision to consider prices “unfair” seems plausible in the present case, given the massive effect of the manipulative strategy on consumer prices.989 Discrimination through congestion management and market segmentation The antitrust cases examined above primarily targeted TSOs for abuses related to the existence of a vertically integrated undertaking favouring its affiliated supply arm in related markets (RWE, ENI, GDF Suez, E.ON Gas and E.ON Electricity). By contrast, SvK was not a vertically c. 987 Koch & Gauer, 2011, p. 233. 988 Ibid., p. 234. 989 Ibid. Part 4 Competition in the European Energy Markets 232 integrated company. It was already a completely unbundled TSO and had no interest in supply activities. 990 Moreover, in the SvK case the Commission took action against an undertaking that was in fact a central administrative authority having no objective of profit maximization. Unlike the situation in the above cases, SvK also did not limit capacity to maximize profits but rather to maintain a single price zone in Sweden. SvK claimed that Sweden should not be divided into subareas due to lack of sufficient liquidity and lack of competition both on the day-ahead market and on subsequent intraday and balancing markets.991 In this case, the Commission concluded that SvK’s behaviour would constitute an abuse of a dominant position for two reasons. The Commission alleged an abuse namely that the restriction of capacity discriminated against certain network customers. The Commission viewed the first abuse as discrimination on grounds of nationality992. The customers who imported electricity from Sweden had to pay a higher price for electricity than customers in Sweden, which was considered discrimination because of their nationality. Moreover, the Commission pointed out that the domestic market was artificially segmented by SvK, thus preventing foreign industrial and other users located outside Sweden to benefit from the internal market.993 By limiting the amount of export transmission capacity available on electricity interconnectors, SvK indeed artificially maintained significantly higher prices in the neighbouring countries, such as Denmark, than in Sweden. The importance of the SvK case is that it primarily established that unbundling, even full ownership unbundling, might not abolish all barriers to an internal energy market.994 It should be noted that the Commission reviewed the SvK case based on EU competition law, whereas the case could have also been addressed under Regulation 1228/2003 and the congestion management guidelines. The case was 990 Hauteclocque & Hancher, 2011, p. 20. 991 See the explanations of SvK’s Director General to the Commission in a letter of 22 May 2008, Case No 39.351 – Øresund interconnector, 356/2006/MA30. 992 Case COMP/39.351, Swedish Interconnectors, para. 42. 993 Ibid., para. 27; Hofmann, 2013, p. 321; Hauteclocque & Hancher, 2011, p. 21. 994 Ibid, p. 22. § 9. Decisional Practice (Jurisprudence) in Energy Markets 233 indeed very regulatory in nature. The Commission’s approach shows that it may also be willing to use competition rules to solve problems related to non-compliance with the sector-specific legislation.995 Article 107 PreussenElektra Subject Matter The case996 is related to the German electricity scheme, which required distribution companies to buy electricity from renewable energy sources at a fixed minimum price, and to the question whether such a scheme is compatible with EU state aid rules. While PreussenElektra operated more than twenty conventional and nuclear power plants in Germany and fed electricity to regional electricity suppliers, mediumscale local undertakings as well as industry, Schleswag was a regional electricity supplier that bought electricity almost exclusively from PreussenElektra – which also owned 65.3% of Schleswag’s shares – for customers in the region of Schleswig-Holstein.997 The “Stromeinspeisungsgesetz” (Law on feeding electricity from renewable energy sources into the public grid, hereinafter “StrEG”) obliged the electricity supply undertakings which operated a general supply network to buy the electricity that is generated exclusively by renewable energy sources within their areas and to pay the (private) providers a fixed minimum price which was considerably higher compared to the electricity produced from non-renewable resources. The additional costs were borne by the suppliers and passed on to upstream network operators/providers if the energy thus purchased exceeded 5% of the energy supplied by the former to end users. This scheme had been notified to the Commission within the scope of Article 108(3) TFEU, and it was duly approved in accordance with the III. A. 1. 995 Ibid. 996 Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 10. 997 Thieme & Rudolf, 2002, p. 226; Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 17–18. Part 4 Competition in the European Energy Markets 234 procedure. However, it was modified during the legislative process and the “hardship clause” was added.998 According to the hardship clause, the supplier had the right to receive compensation from the network operator for its additional costs where the proportion of the renewable energy purchased under this scheme exceeded 5% of the energy supplied to end customers by the supplier.999 At the end of 1998, the share of electricity supplied through renewable sources reached 5% of Schleswag’s total sales. Schleswag invoked the hardship clause from the StrEG and invoiced PreussenElektra for the additional costs caused by the obligatory purchase of wind-generated electricity from PreussenElektra. PreussenElektra transferred the instalment for May 1998, reserving the right to claim the money back at any time. Later it made an application to the German Court of First Instance (the Landgericht Kiel) for the part of the sum paid to Schleswag.1000 PreussenElektra argued that the sum claimed had been paid to Schleswag without a valid legal reason since Paragraph 4 of the StrEG, on which that payment was based, was contrary to the TFEU’s directly applicable provisions on State aid.1001 The German Court of First Instance requested the CJ to decide whether Paragraph 4(1) of the StrEG was compatible with Article 107 TFEU concerning subsidies. Decision The CJ examined the question whether the rules on payment and compensation for supplies of electricity constitute state aid for the purposes of Article 107 TFEU.1002 During its review, the CJ took into consideration the criteria set forth in Article 107 TFEU regarding state aids. 2. 998 Paragraph 4 of the StrEG; Talus, 2013, p. 142. 999 “[…] in so far as the kilowatt hours to be compensated for exceed 5% of the total kilowatt hours supplied by the electricity supply undertaking through its network during a calendar year, the upstream network operator shall be obliged to reimburse the electricity supply undertaking in respect of the supplementary costs resulting from the kilowatt hours exceeding that share.” Case C-379/98, PreussenElektra, para. 10. See: Armenteros & Lefevere, 2001, p. 344. 1000 Case C-379/98, PreussenElektra, para. 22. 1001 Ibid., para. 23. 1002 Ibid., para. 27. § 9. Decisional Practice (Jurisprudence) in Energy Markets 235 It recalled that Article 107(1) TFEU provides that any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is, insofar as it affects trade between Member States, incompatible with the common market.1003 The CJ stated that an obligation to purchase electricity produced from renewable energy sources at minimum prices indisputably conferred a certain economic advantage on producers of that type of electricity, since it guarantees them, with no risk, higher profits than they would otherwise realise.1004 Similarly, the criteria regarding the distortion of competition and effects on trade among Member States were considered to be met, although it was not stated clearly. However, the CJ clearly expressed that the fourth criteria, namely that aid must be granted by a Member State or through state resources in any form whatsoever, has not been fulfilled. It adopted a very narrow interpretation of the concept of “state resources”1005 and determined that the obligation imposed on private electricity supply undertakings to purchase electricity produced from renewable energy sources at fixed minimum prices did not involve any direct or indirect transfer of state resources to undertakings which produce that type of electricity.1006 The CJ took the view that support measures financed by private companies cannot be considered to be state aid within the scope of Article 107(1) TFEU even though such measures were established by the State.1007 1003 “Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.” Cf. Case C-206/06, Essent Netwerk Noord, [2008] ECR I-5497, para. 64. 1004 Case C-379/98, PreussenElektra, para. 54. 1005 Talus, 2013, p. 143. 1006 Case C-379/98, PreussenElektra, para. 59. 1007 Ibid., para. 58–62. Part 4 Competition in the European Energy Markets 236 EDF Subject Matter The case1008 is related to whether tax breaks granted by France to EDF was compatible with EU state aid rules. EDF is a French electric utility company which operates in France as well as in several other European countries. The majority of the ownership belongs to the French State. On 16 October 2002, the Commission initiated a formal investigation against EDF claiming that tax breaks granted to EDF were incompatible with EU rules on state aid. Decision During its in-depth examination, the Commission found that the French government did not levy all the corporate tax which would ordinarily be payable by EDF. In 1956, the French Government granted a concession to EDF to manage the high-voltage transmission network for 75 years. In 1997, the Government established that EDF was deemed to have owned the network since 1956. Therefore, the French authorities reorganised EDF’s balance sheet and certain accounting provisions were reclassified as capital injections without being subject to corporation tax.1009 During its examination, the Commission took into consideration the criteria used by the CJ regarding state aids: – an intervention through state or state resources; – the possibility of this intervention to affect the trade between Member States; B. 1. 2. 1008 C(2003)4637, EDF, Commission Decision of 16 December 2003. 1009 Previously, assets allocated to the high-voltage transmission network were classified as “assets under concession” under the balance sheet. “No 97–1026 of 10 November 1997 provided that ‘as at 1 January 1997, the value of the assets in kind allocated under concession to the RAG appearing as liabilities on EDF’s balance sheet shall be entered, net of the corresponding revaluation differences, under the item ‘Capital injections’’. The share of the provisions corresponding to grantor rights was therefore to be reclassified as capital injections without being subject to corporation tax.” C(2003)4637, EDF, Commission Decision of 16 December 2003, para. 28. § 9. Decisional Practice (Jurisprudence) in Energy Markets 237 – an advantage for the recipient; – distortion of competition. The Commission highlighted that besides positive benefits, such as subsidies, the notion of aid includes financial advantages granted by the public authorities and reducing the charges that are normally included in an undertaking’s budget. It can be stated that such advantages would have the same effect as subsidies. The CJ also repeated in numerous occasions that the non-collection of taxes which should normally have been collected is equated to the consumption of state resources.1010 It has been observed that the non-collection of the full amount of corporation tax due in respect of the 1997 financial year derived directly from a measure adopted by the State.1011 The Commission noted that this tax exemption conferred on EDF an undue economic advantage compared with other operators on the market and thus distorted competition. The Commission also established that EDF was already in a firm position in certain markets in other Member States in 1997 and that the aid resulting from the non-payment of corporation tax by EDF on some of the accounting provisions created free of tax for the renewal of the high-voltage transmission network inevitably affected trade between Member States.1012 Therefore, the Commission concluded that the tax exemption constituted state aid that was incompatible with the internal market as it had the effect of strengthening EDF’s competitive position in relation to its competitors.1013 The Commission also requested France to recover this aid.1014 On 15 December 2009, the General Court annulled the Commission’s decision on the grounds that, when re-examining the French au- 1010 Ibid., para. 101. The collection of a tax is revenue attributed to the state. Thus, a noncollection of taxes would be considered forgone state revenue and would thus involve state resources. 1011 Ibid. 1012 Ibid., para. 115. 1013 Ibid., para. 154. 1014 European Commission, State aid: Commission reopens inquiry into the tax aid awarded to EDF following Court judgment, 2013. “[…] The Commission’s investigation confirmed that EDF received an individual, unjustified tax exemption which gave it an advantage to the detriment of its competitors, in breach of EU state aid rules.” European Commission, State aid: Commission orders France to recover €1.37 billion in incompatible aid from EDF, 2015. Part 4 Competition in the European Energy Markets 238 thorities’ reclassification of the provisions as capital, the Commission had not checked whether a private investor would have invested a comparable amount under similar circumstances.1015 Specifically, a private investor test helps to determine whether a state incentive constitutes an economic advantage and whether it actually distorts or endangers competition. Article 107(1) TFEU prohibits any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings, or the production of certain goods, insofar as it affects trade between Member States.1016 Under certain circumstances, however, financial benefits granted by Member States are not prohibited. If the same measure would have been adopted by a private investor operating in normal market economy conditions and being in a situation similar to the State’s, the measure in question would not be considered state aid.1017 The General Court’s judgment was confirmed by the CJ in June 2012.1018 According to the CJ, the applicability of the private investor test ultimately depends on the Member State concerned having conferred, in its capacity as shareholder and not in its capacity as public authority, an economic advantage on an undertaking belonging to it.1019 The CJ stated that the application of such a test would make it possible to determine whether, in similar circumstances, a private shareholder would have made an additional investment in an undertaking in a situation comparable with that of EDF and in an amount equal to the tax due.1020 After the CJ’s decision, the Commission reopened the inquiry into tax exemptions which were granted to EDF with the aim to reaching a decision in accordance with the criteria laid down by the European Courts. During its investigation, the Commission was unable to gather evidence proving that the French Government in the past acted as a 1015 Ibid. 1016 Article 107(1) TFEU does not distinguish between state intervention in public undertakings or in private undertakings. Werner, 2012. 1017 Ibid. 1018 Case C-124/10 P, EDF v Commission, [2012] 3 CMLR 17. 1019 Ibid., para. 81. 1020 Ibid., para. 95. § 9. Decisional Practice (Jurisprudence) in Energy Markets 239 shareholder or that any ex ante study had been undertaken to demonstrate the profitability of the investment. Furthermore, the Commission noted that the private investor test was not met, in particular because at the time the profitability that could reasonably be expected of such an investment was too low. It follows that the tax exemption granted to EDF cannot be considered an investment made on economic grounds.1021 Moreover, the Commission expressed that the French Government granted the aid in a manner which was essentially infringing upon Article 108(3). It reiterated its previous statement and recalled that the exemption from the corporate tax through the reclassification of certain accounting provisions as capitalisation constituted an aid and was incompatible with the internal market as it distorted competition.1022 The Commission stated that the EDF should refund the aid unlawfully paid in the form of an exemption from corporation tax in order to restore the competition environment which had been tainted due to the tax exemption.1023 EDF was dissatisfied with the Commission’s new decision and brought an action before the General Court for its annulment.1024 On 16 January 2018, the General Court upheld the Commission’s decision. It recalled that neither in its judgment of 2009 nor in CJ’s judgment of 2012 was it assumed that the private investor test was applicable in EDF case, thus leaving the Commission to determine whether the private investor test was applicable.1025 The General Court noted that the private investor test only applies if the Member State concerned granted the economic advantage as a shareholder and not as public authority. According to the General Court, the private investor test was not applicable, and it highlighted that, when a Member State relies on the private investor test, it is incumbent upon the Member State to establish unequivocally and on the basis of objective, verifiable and contem- 1021 European Commission, state aid: Commission orders France to recover €1.37 billion in incompatible aid from EDF, 2015. 1022 SA.13869, EDF, para. 216. 1023 Ibid., para. 220. 1024 Case T‑747/15, EDF v Commission, Judgment of the General Court of 16 January 2018. 1025 General Court of the European Union, The General Court of the EU upholds the Commission’s decision ordering France to recover €1.37 billion in the context of State aid granted to EDF, 2018. Part 4 Competition in the European Energy Markets 240 poraneous evidence that it acted as a private investor.1026 The General Court noted that neither EDF nor France submitted evidence sufficient to demonstrate the applicability of the private investor test.1027 On 27 March 2018, EDF submitted an appeal against the General Court’s decision of 16 January 2018 to the CJ. On 13 December 2018, the CJ dismissed EDF’s appeal and reconfirmed that the aid which had been granted back in 1997 had to be recovered. The EDF decision can be considered as one of the most significant decision concerning state aid since the European Courts attempted to define, for the first time, the necessary criteria to distinguish between the state acting as shareholder and the state exercising public power. Merger Regulation ENI/EDP/GDP Subject Matter The case1028 is related to the assessment of whether a proposed concentration by EDP and ENI was compatible with the common market. EDP is the ex-incumbent electricity company with main activities consisting of the generation, distribution and supply of electricity in Portugal. EDP also controls the Spanish company HC Energía, which is operating in electricity and gas markets. GDP is the ex-incumbent gas company in Portugal. It is a wholly owned subsidiary of the Portuguese company Galp Energia, which is jointly controlled by the Portuguese State and ENI, active in both the oil and the gas sectors. GDP and its subsidiaries cover all levels of the gas chain in Portugal. GDP imports natural gas into Portugal through its subsidiary Transgas, which is responsible for the transportation, storage, transport and supply through the high-pressure gas pipeline network. ENI is an Italian state-controlled company mainly operating in the natural gas and oil markets. On 9 July 2004, EDP, along with ENI, notified the Commission regarding a proposed concentration IV. A. 1. 1026 Case T‑747/15, EDF, para. 136. 1027 Ibid., para. 347. 1028 Case COMP/M.3440, ENI/EDP/GDP, Commission decision of 9 December 2004. § 9. Decisional Practice (Jurisprudence) in Energy Markets 241 by which EDP and ENI would acquire joint control of GDP by way of a purchase of shares.1029 During its initial investigation, the Commission realised that the merger might remove GDP as a potential competitor of EDP in the Portuguese electricity markets.1030 The elimination of a potential competitor could strengthen EDP’s dominance in Portuguese electricity markets. Having concerns that the proposed acquisition could significantly strengthen EDP’s dominant position in the electricity wholesale and retail markets in Portugal, the Commission decided to open an indepth inquiry.1031 Decision The Commission analysed the possible impact of the proposed transaction on the gas and electricity supply markets in Portugal. In its 9 December 2004 decision, the Commission concluded that the proposed transaction would strengthen EDP’s dominant position in the electricity wholesale and retail markets in Portugal1032, which would significantly impede effective competition in this market.1033 Moreover, gas was considered at that time as one of the most efficient ways to produce electricity, so that the concentration would have made current and possible future power producers in Portugal dependent on their main competitor, namely EDP. As for natural gas markets, the proposed transaction would also strengthen GDP’s dominant position in the relevant gas markets in Portugal1034 through the foreclosure of a signifi- 2. 1029 Ibid., Prior notification of a concentration, 2004. 1030 European Commission, In-depth investigation into EDP/ENI’s proposed acquisition of GDP, 2004. 1031 Ibid. 1032 EDP held 70–80% of generation capacity, accounts for 70–80% of generation and is the largest importer of electricity. COMP/M.3440, ENI/EDP/GDP, para. 282. 1033 Prior to the merger, there were strong incentives for GALP/GDP to enter the wholesale electricity market and to develop as EDP’s main competitor. However, the proposed transaction would eliminate the potential competitor. Ibid., para. 335. 1034 The Commission observed that, through Transgas, GDP controlled all the available entry capacity of the international pipeline coming from Algeria. It also owned and operated the Sines LNG terminal and the Carriço storage facility. GDP/Transgas could thus significantly limit access by third parties to the Portuguese network even Part 4 Competition in the European Energy Markets 242 cant part of the gas demand (controlled by EDP) and the elimination of EDP as the most likely entrant in the gas markets.1035 The Commission rejected the remedies submitted by the parties on 26 November 2004 and stated that they did not fully and unquestionably address the competition concerns.1036 Consequently, the Commission declared the proposed transaction incompatible with the common market and prohibited it because effective competition would be significantly impeded in a substantial part of the common market.1037 On 21 September 2005, the General Court upheld the Commission’s decision to prohibit the proposed transaction.1038 The General Court’s decision showed that undertakings must propose adequate remedies in due time with a view to addressing fully the competition concerns identified by the Commission. E.ON/MOL Subject Matter The case1039 is related to the assessment of whether a proposed concentration by E.ON and MOL was compatible with the common market. E.ON is a German energy company which focuses on the supply of electricity and gas. Prior to the concentration, E.ON was already active on the gas and electricity retail markets in Hungary through its control of several regional distribution companies. MOL is a vertically integrated oil and gas group primarily active in Hungary. It is in particular the B. 1. if national regulations ultimately impose rules on third parties’ access to the gas infrastructures. Ibid., para. 495. 1035 As an electricity incumbent, EDP had strong advantages in entering the market for the supply of gas to small customers; the ownership of a local distribution company could give it further advantages and proved its ability to enter/expand. However, the potential transaction would lead EDP’s elimination as an immediate and potential competitor. Ibid., para. 561–595, 914; European Commission, Mergers: Commission prohibits acquisition of GDP by EDP and ENI, 2004. 1036 Case COMP/M.3440, ENI/EDP/GDP, para. 912. 1037 European Commission, Mergers: Commission prohibits acquisition of GDP by EDP and ENI, 2004. 1038 Case T-87/05, EDP v Commission, 2005, Judgment of the General Court of 21 September 2005; European Commission, Mergers: Commission welcomes CFI ruling in EDP/ENI/GDP case, 2005. 1039 Case COMP/M.3696, E.ON/MOL, Commission decision of 21 December 2005. § 9. Decisional Practice (Jurisprudence) in Energy Markets 243 incumbent gas supplier in Hungary.1040 On 2 June 2005, the Commission received a notification of a proposed concentration by which the undertaking E.ON Ruhrgas would acquire control of the whole of the undertakings MOL WMT and MOL Storage, at the time solely controlled by MOL Hungarian Oil and Gas Plc (MOL), by way of the purchase of shares. E.ON Ruhrgas would also acquire MOL’s shareholdings in Panrusgáz, a joint venture company between OAO Gazprom and MOL.1041 The Commission opened a detailed investigation into the planned acquisition of the gas wholesale and storage activities of the Hungarian oil and gas group MOL by E.ON within the scope of the EU Merger Regulation.1042 On 7 July 2005, the Commission decided to initiate proceedings in the above-mentioned case after finding that the notified concentration raised serious doubts as to its compatibility with the common market.1043 After its initial market investigation, the Commission concluded that the proposed concentration could cause serious concerns regarding competition at all levels of the electricity and gas supply chain in Hungary, given the vertical and horizontal overlaps between the two undertakings’ business activities.1044 Therefore, the Commission decided to open an in-depth inquiry. Decision The Commission established on the basis of its investigation and its economic assessment that such transaction would directly lead to the creation of a vertically integrated undertaking, active both in electricity generation, wholesale and retailing, and in gas, equally wholesaling and retailing. The Commission’s investigation revealed that access to gas resources is crucial for electricity retail activities as dual offers are expected to play an important role in electricity retail markets.1045 The 2. 1040 European Commission, Mergers: Commission opens an in-depth investigation into E.ON’s acquisition of Hungary’s MOL gas business, 2005. 1041 Case COMP/M.3696, E.ON/MOL, Prior notification of a concentration, 2005. 1042 European Commission, Mergers: Commission opens an in-depth investigation into E.ON’s acquisition of Hungary’s MOL gas business, 2005. 1043 Case COMP/M.3696, E.ON/MOL, Initiation of proceedings, 2005. 1044 European Commission, Mergers: Commission opens an in-depth investigation into E. ON’s acquisition of Hungary’s MOL gas business, 2005. 1045 Case COMP/M.3696, E.ON/MOL, para. 719. Part 4 Competition in the European Energy Markets 244 proposed transaction might have strengthened the control of the new entity over all the gas resources available in Hungary, both domestic and imported.1046 Moreover, the new entity would have the ability and the incentive to significantly hinder competition on the downstream electricity and gas markets by raising rivals’ costs or by foreclosing its actual and potential competitors on these markets, as its competitors would necessarily have to rely on the new entity to procure their wholesale gas.1047 The Commission concluded that the proposed transaction would thus lead to higher prices on all electricity retail markets.1048 In order to address the concerns identified by the Commission, E.ON offered comprehensive and far-reaching remedies with a combination of both structural and behavioural measures. Firstly and most notably, MOL undertook to divest its remaining minority interest in the wholesale and storage subsidiaries acquired by E.ON (MOL WMT and MOL Storage), thereby ensuring the structural separation of the various gas activities (from production to distribution) in Hungary.1049 Through this commitment, a full ownership unbundling of gas production and transmission activities from gas wholesale and storage activities has been achieved. Secondly, E.ON offered to release gas quantities through yearly public auctions (gas release programme) and to assign half of the supply contract for the Hungarian domestic production of gas to a third party (so-called contract release).1050 Thirdly, E.ON undertook to release significant volumes of gas on the market at competitive conditions (socalled gas release) and to implement an 8-year gas release programme. Fourthly, E.ON committed to grant access to storage capacities at regulated price and conditions to end users and wholesalers who would 1046 European Commission, Mergers: Commission approves acquisition by E.ON of MOL’s gas business, subject to conditions, 2005. 1047 Ibid.; Case COMP/M.3696, E. ON/MOL, para. 719–733. 1048 Case COMP/M.3696, E.ON/MOL, para. 707. 1049 According to the commitments, MOL would divest its remaining shareholdings of 25% in MOL Storage and MOL WMT within six months following the date of closing. In addition, MOL would not acquire direct or indirect minority stakes in MOL WMT and MOL Storage for a period of 10 years as long as E.ON is a majority shareholder of these companies. Ibid., para. 735–736. 1050 European Commission, Mergers: Commission’s conditional approval of E.ON’s acquisition of MOL’s gas business – frequently asked questions, 2005. § 9. Decisional Practice (Jurisprudence) in Energy Markets 245 purchase gas directly through the gas release programme or the contract release.1051 The Commission concluded that the commitments submitted by E.ON and MOL were sufficient to address the competition concerns raised by this concentration.1052 A novelty of this case is that the Commission has, for the first time within the context of merger control, accepted gas release and contract release as measures aimed at remedying competition concerns in the energy sector.1053 There are two main differences between the EDP/GDP merger and the E.ON/MOL merger. First, unlike the former, the latter did not create a national champion. The EDP/GDP merger would have left one undertaking with strong state connections dominant in both the electricity and gas markets in Portugal.1054 Secondly, while EDP/GDP merger raised significant horizontal competition concerns1055, the E.ON/MOL merger did not raise any horizontal competition concerns, because the involved companies were not active in the same markets. The main competition issues were actually of a vertical nature (companies active in downstream/upstream markets). E.ON and MOL were operating in different segments of gas and electricity markets in Hungary. E.ON had essentially a strong market position at the level of retail gas and electricity supply, at the distribution of gas and electricity, through its control of regional distribution companies, and at the electricity generation, while MOL was active at the upstream level, in gas production, transmission, storage and wholesale.1056 Therefore, the Commission was concerned that the proposed merger would create a fully vertically integrated entity.1057 1051 In particular, E.ON undertakes to offer access to 158 sufficient storage capacities for such end users and wholesalers even if they purchase gas for the first time or develop an increased demand for storage when buying gas quantities through the gas release programme or the contract release. Case COMP/M.3696, E. ON/MOL, para. 755. 1052 Ibid., para. 824. 1053 Bartok et al., 2006, p. 11. 1054 Tatcher, 2014, p. 459. 1055 Both companies were potential competitors. 1056 European Commission, Mergers: Commission’s conditional approval of E.ON’s acquisition of MOL’s gas business – frequently asked questions, 2005. 1057 Case COMP/M.3696, E.ON/MOL, para. 282. Part 4 Competition in the European Energy Markets 246 GDF/Suez Subject Matter The case1058 is related to assessment of whether a proposed concentration by GDF and the Suez Group was compatible with the common market. GDF operated on all levels of the gas sector, and additionally it was active in electricity production and retail. GDF was active mainly in France, but also in Belgium, Germany, the United Kingdom, Luxembourg, Hungary and Spain. Along with Centrica, GDF exercised control over SPE, the second largest firm in the Belgium gas and electricity markets. The Suez Group mainly operated in the gas and the electricity sector, in energy services and water services in France and Belgium. Furthermore, Suez consisted of bodies such as Electrabel (electricity and gas), Distrigas, Fluxys and Suez Energy Services. On 10 May 2006, the Commission received a notification concerning a proposed concentration by which GDF would enter into a full merger with the Suez group by way of an exchange of shares. Through the proposed merger, GDF would fully acquire Suez, which would cease to exist as a legal entity.1059 The Commission raised doubts, on the basis of its initial market investigation, as to the proposed transaction’s compatibility with the common market1060 as it might cause serious competition concerns at all levels of the gas and electricity supply chain in Belgium and at all levels of the gas chain in France, given the vertical relationships and the horizontal overlaps between the two undertakings’ business activities.1061 The Commission noted that the proposed transaction fell within the scope of the Merger Regulation. In June 2006, the Commission decided to open a detailed investigation into the planned merger between GDF and the Suez Group of France within the scope of the EU Merger Regulation.1062 C. 1. 1058 COMP/M.4180, GDF/Suez, Commission Decision of 14 November 2006. 1059 Ibid., Prior notification of a concentration, 2005. 1060 Ibid., para. 11. 1061 European Commission, Mergers: Commission opens in-depth investigation into merger between Gaz de France and Suez group, 2006. 1062 Ibid. § 9. Decisional Practice (Jurisprudence) in Energy Markets 247 Decision The Commission identified serious risks namely that the proposed transaction might result in a significant impediment to competition as it would combine the supply activities of the two main gas and electricity operators in Belgium with two of the three main gas operators in France. Furthermore, it would give the new entity control of most gas imports into both Belgium and France. Finally, the Commission found potential vertical problems stemming from the parties’ control over essential infrastructure (e.g., transmission and transport networks, storage facilities).1063 In the Belgium gas market, the Commission concluded that the merger as notified would significantly impede effective competition in the various gas markets, particularly by enhancing the dominant position of Distrigas. Due to the dual impact of the following two factors, Distrigas’s position would be enhanced because: – GDF’s operations in Belgium would be absorbed by Distrigas and – the transaction would remove the strong competitive pressure hitherto exerted by GDF. GDF was Distrigas’s main competitor and also had huge potential for growth. The Commission noted that, due to the fact that it was already extremely difficult to enter the Belgian gas markets and the merger would raise entry barriers even further, it would be unlikely for competitors to be able to take over GDF’s position and compensate for the competitive pressure which would be eliminated as a result of the proposed merger.1064 Regarding the French gas market, the Commission concluded that the notified merger would considerably hinder effective competition in the various markets for the supply of gas in France, particularly because of the strengthening of GDF’s dominant position.1065 Contrary to the situation in the Belgium market, GDF would incorporate Suez’s activities in France (in particular the elimination of current competition). Moreover, the transaction would eliminate the strong competi- 2. 1063 Ibid. 1064 COMP/M.4180, GDF/Suez, para. 107. 1065 Ibid., para. 386. Part 4 Competition in the European Energy Markets 248 tive pressure exerted by Suez (through Distrigas) in the French gas markets.1066 As for electricity markets, the Commission established that through the notified merger Suez (Electrabel) would also strengthen its already dominant position, as GDF would be eliminated as a potential entrant on the market for the gas supply to electricity producers in Belgium.1067 The parties offered comprehensive remedies in order to eliminate the Commission’s concerns concerning competition, which included1068: – the divestiture of Suez Group’s holding in Distrigas, – the divesture of GDF’s stake in SPE, – the restructuring of the activities of Fluxys S.A. and the relinquishing of all control over the company, – a series of additional measures (most notably investments) relating to gas infrastructure in Belgium and France (the parties endeavoured to make a series of investments to increase Belgian and French gas infrastructure capacity), and – divestment of the Cofathec Coriance and the district heating networks operated by Cofathec Services. Considering these structural remedies, the Commission decided that the concerned merger would not significantly impede effective competition in the common market or a substantial part of it and that the merger should therefore be declared compatible with the Merger Regulation.1069 EDF/British Energy Subject Matter The case1070 is related to assessment of whether a proposed concentration by GDF and the Suez Group was compatible with the common market. British Energy was active in the generation, wholesale trading and supply D. 1. 1066 Ibid., para. 391. 1067 Ibid., para. 840. 1068 Ibid., para. 1147–1166. 1069 Ibid., para. 1229. 1070 COMP/M.5224, EDF/British Energy, Commission Decision of 22 December 2008. § 9. Decisional Practice (Jurisprudence) in Energy Markets 249 of electricity as well as in the provision of other electricity related services in Great Britain. On 3 November 2008, the Commission received a notification of a proposed concentration by which the undertaking EDF through Lake Acquisitions Ltd (Lake Acquisitions) would acquire control of the undertaking British Energy plc (British Energy) by way of the purchase of shares.1071 During its first phase investigation, the Commission found that the transaction, as initially notified, would have been likely to raise serious competition concerns. Decision The Commission had concerns regarding four main points: – the changed ability and incentive for strategic capacity withdrawal with the intention to increase prices; – the reduction in wholesale market liquidity; – a high concentration in the ownership of sites most likely to be suitable for new nuclear build; – the potential for the combined entity’s holding of three National Grid connection agreements in relation to Hinkley Point to act as a barrier to entry for other competitors in the relevant region.1072 EDF and British Energy submitted remedies to address the Commission’s concerns. Further to the results of the market test of these remedies and in its own assessment, the Commission concluded that the remedies proposed were not sufficient to remove the two first areas of concern mentioned above. However, the parties subsequently submitted an enhanced remedy package. Overall, the commitment included the agreement to divest two “flexible plants” (EDF’s power generation plant at Sutton Bridge and the British Energy’s generation plant at Eggborough), to sell certain minimum volumes of electricity into the wholesale market over a period of time, to divest a site potentially suitable for building a new nuclear power station located at either Dungeness or Heysham and to end one grid connection agreement with 2. 1071 Ibid., Prior notification of a concentration, 2008. 1072 Ibid., para. 7. Part 4 Competition in the European Energy Markets 250 National Grid at Hinkley Point.1073 The Commission concluded that the revised remedy package submitted by the parties in phase I was sufficient to remove all identified competition concerns. That enabled the Commission to clear the deal without opening a phase-II investigation.1074 1073 European Commission, Mergers: Commission clears proposed acquisition of British Energy by EdF, subject to conditions, 2008; COMP/M.5224, EDF/British Energy, para. 198. 1074 Drauz et al., 2010, p. 18. § 9. Decisional Practice (Jurisprudence) in Energy Markets 251

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Abstract

Since the beginning of the 1990s, Europe has been struggling to establish a competitive as well as a fully integrated internal energy market. Until the early 1990s, the European energy markets consisted of national monopolies possessing vertically integrated structures. They were also still nationally segregated. Since, the EU has made the decision to open European energy markets to competition and subsequently establish an internal energy market.

The European energy markets are currently controlled by a dual structure consisting of two different regulatory frameworks: competition law and sector-specific regulations. The primary goal of these legal instruments is the establishment of an internal energy market.

This book aims at analysing the development of the European energy markets and policies from the perspective of competition law as well as sector-specific regulations and, hence, identifying the problems regarding the introduction of competition into the energy markets.