Part 1 The Fundamentals of Energy Markets and Energy Companies in:

Cansu D. Burkhalter

Legal and Regulatory Framework of European Energy Markets, page 7 - 30

Competition Law and Sector-Specific Regulations

1. Edition 2020, ISBN print: 978-3-8288-4429-2, ISBN online: 978-3-8288-7440-4,

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

Tectum, Baden-Baden
Bibliographic information
The Fundamentals of Energy Markets and Energy Companies Distinction of Energy Markets Energy in all its forms can help people live an easier and more comfortable life.1 It is a main driving force of all economies. Adequate energy resources, sustainable energy infrastructure and robust energy markets are among the essential needs of a successfully functioning society.2 In order to ensure people’s well-being and sustainable growth as well as the competitiveness of EU industry, access to a reliable, steady and secure supply of energy at competitive and affordable prices is crucial.3 Energy is often considered to be a commodity4 and energy markets include many different commodities that are quite distinct in nature. In principle, energy markets can be classified into the three following categories: a) coal markets b) oil and natural gas markets c) electricity markets5 This classification roughly corresponds to the historical pace at which these markets were opened to competition.6 Part 1 § 1. 1 Dahl, 2015, p. 1. 2 Mukhigulishvili & Margvelashvili, 2012, p. 1. 3 ICF Consultancy Services & DIW Berlin, 206, p. 2. 4 Aronson & Stern, 1984, p. 15. 5 Electricity markets including renewable energy markets. 6 Eydeland & Wolyniec, 2003, p. 2. 7 Coal Market World Coal is one of the three major forms of fossil fuels, consisting of carbonised vegetal matter.7 It is primarily used for electricity generation and steel production worldwide. There are various types of coal with different physical and chemical characteristics.8 These characteristics determine the price of coal and its suitability for various uses.9 Inasmuch as coal is the most abundant fossil fuel and thus affordable, many developed and developing countries choose coal for electricity generation. In Europe, coal helps to maintain energy markets competitive. The industrial and residential electricity consumers in the EU would be faced with much higher energy prices without inter-fuel competition from coal.10 The international coal industry has undergone fundamental changes during the past fifty years. In the 1960s, the coal market was considered rather local. Production was almost exclusively aimed at national usage, and international coal trade was rare. The high transportation costs involved in shipping and handling coal constituted a natural obstacle to the development of a global coal market. However, the oil crises in 1973 and 1979, which led to rises in oil prices, enhanced the position of coal, and the demand for coal increased substantially. Due to significant reductions in shipping costs during this period, the economic attractiveness of coal increased.11 The coal prices tend to be relatively stable and are not drastically altered or affected by pertinent international events because of the prevalence of longer-term supply and purchase commitments in this market.12 The belief in the non-exhaustible nature of coal supply is substantiated by the fact that there exists a well-developed infrastructure in the world in terms of coal, because it can in a quintessentially I. A. 7 InterEnerStat, 2008, p. 5. 8 There are three main categories of coal: hard coal, sub-bituminous coal and brown coal (also called lignite). Ibid., p. 5. 9 Burger et al., 2014, p. 7. 10 Euracoal, 2017, p. 9. 11 Wårell, 2006, pp. 99–100. 12 Robinson et al., 2000, p. 45; Kilian, 2015. Part 1 The Fundamentals of Energy Markets and Energy Companies 8 easy manner be stored and brought to the market. Consequently, coal prices did not witness an imminent hike, as was the case with oil prices during the first and second oil crisis. Coal prices were quite stable and were not linked to oil prices until recently.13 Furthermore, in comparison with the alternative fossil fuels, the coal sector lacks a price-fixing institution such as the Organisation of the Petroleum Exporting Countries (OPEC); as a consequence, coal prices have been determined in a free manner in the market for the past thirty years. Europe In Europe14, the economic significance of coal has witnessed an increase as a result of the enlargement of the EU in 2004 and, also, 2007. In 2013, 28% of electricity generation in the EU was coal-based.15 Furthermore, in several EU Member States the share of coal in energy generation amounts to over 50%, for instance 59% in the Czech Republic and 53% in Greece.16 Since the beginning of 2004 coal production began to decrease in then existing Member States as the imported coal was considered to be relatively economical. However, coal remains one of EU’s most important energy sources, meeting 15.5% of EU primary energy demand in 2016.17 Among Member States, Germany can be considered as the primary leader in coal production. As a result, Germany ranks at position eight in global coal production after China, the USA, India and Indonesia.18 However, notwithstanding such high coal production, Germany’s domestic coal demand constitutes only a share of 3% in the B. 13 Kanai, 2010, pp. 8–9. 14 About 80% of Europe’s fossil fuel reserves comprise hard coal and lignite, and most EU Member States have access to reserves of one or both. 15 In Europe, aside from energy generation, coal is used in various sectors such as iron and steel manufacture and cement production. 16 Mills, 2010, p. 1. 17 Euracoal, 2017, p. 9; EEA, Primary energy consumption by fuel, 2018, https:// (accessed: 1 June 2019). 18 In Germany, the most extracted form of coal is lignite, whereas it imports solid coal from countries such as Russia, Colombia and the USA. IEA, Coal Information, 2016, p. xi. § 1. Distinction of Energy Markets 9 market—which is an insignificant share compared to the 48% consumption rate of China along with the 11% consumption rate of the USA.19 Nevertheless the aforementioned observation, the currently increasing natural gas prices and also the nuclear phase-out have led Member States to look to alternative energy resources, whereby one of the primary alternative resources is coal. The main advantage of coal is its security of supply and its competitive price. Energy produced by coal is cheaper and more affordable than other energy sources. Moreover, coal is the most abundant fossil fuel on earth. There are, however, some significant disadvantages to using coal. The unremitting use of coal by numerous Member States brought a multitude of environmental concerns such as the greenhouse gas emissions. The combustion of coal involves harmful by-products which cause pollution and contribute to global warming. For this reason, the EU has been struggling to decrease the amount of carbon emissions resulting from coal use and, thereby, takes into consideration studies such as CCS and EU ETS. The rapidly burgeoning concerns with respect to global warming and greenhouse gas emissions have fuelled a broad range of initiatives focusing on reducing CO2 produced from coal-fired power plants. Therefore, in all coal-consuming Member States several on-going activities centred on the development and application of clean coal technologies alongside carbon capture and storage which have come into being. Thus, it can be empirically observed that the long-term future of coal use necessitates the utilisation of CCS20, and the future of coal consumption in Member States will depend heavily on the increasing use of high-efficiency power plants coupled with the widespread deployment of CCS.21 As part of the above-mentioned studies, in 2007 the Communication on Sustainable Power Generation from Fossil Fuels22 was published within the scope of the EU energy package with the objective to decrease the carbon emissions. The communication examined the man- 19 Jungjohann & Morris, 2014, p. 5. 20 Wilde, 2013. 21 Mills, 2010, p. 73. 22 European Commission, Sustainable power generation from fossil fuels: aiming for near-zero emissions from coal after 2020, 2007. Part 1 The Fundamentals of Energy Markets and Energy Companies 10 ner in which the development of energy security could be fostered and also the particular manner in which the greenhouse gas emissions could be decreased. It included an addendum outlining the existing CCS strategies and the related programmes in the EU. Eventually, in 2009, the European Carbon Dioxide Capture and Storage (CCS) Demonstration Project Network was implemented. Oil and Natural Gas Market Oil Market World The oil market is certainly the most prominent among the energy markets since oil remains the world’s leading fuel, accounting for 32.9% of total global energy consumption.23 Crude oil24 is a liquid found in reserves spread across particular regions of the earth, where it can be accessed from the surface.25 Oil, as a basic energy resource, can be considered as immensely significant in the lives of human beings. That fact is magnified by a fundamental truism, namely that nearly every sector of the economy, national or international, depends on this natural resource. For such reason, oil is distinct from the other energy resources in the world and subsequently occupies a strategic position. High-energy density and the ease of handling for storage and transport are the main advantages of oil as an energy carrier compared with other primary energy sources. Today, crude oil is still the main source of energy in the transportation sector and plays an important role in the chemical industry and power generation.26 II. A. 1. 23 World Energy Council, 2016, p. 14; BP, Energy Outlook to 2035, 2015. 24 Chemically, crude oil is a mixture of hydrocarbons with different molecular weights. For actual usage, crude oil is transformed via a refinery process into different petroleum products, such as fuel oil or gasoline. Because of oil’s great economic importance historically, oil markets have always been subject to political regulations and interventions. Burger et al., 2014, p. 7. 25 Ibid. 26 Ibid. § 1. Distinction of Energy Markets 11 The oil market has a complex and very broad structure including exploration, transportation, processing and marketing. It is also a dynamic structure due to its reliance on many independent as well as interdependent political, economic, socio-cultural and technological factors. The use of oil for commercial purposes dates back to the mid-19th century. Edwin L. Drake is known to have established the first modern, commercial oil well in 1859, near Titusville, Pennsylvania, and also to have launched the export of oil from Philadelphia to London through a ship named Elizabeth Watts. This was an important move to make the oil industry vital in world economy.27 In 1863, John D. Rockefeller established an oil processing company and pioneered the transportation of oil through pipes. In the following period, it was realised by Rockefeller that in the future he couldn’t compete with the small oil refineries; for this reason, he founded the Standard Oil Co. in Cleveland, Ohio, during 1870. Within one year of incorporation the Standard Oil Co. gained control of 10% of the American oil industry. With the passage of time, it came to wield control over 80% of the oil processing industry and also 90% of pipeline transportation. The Standard Oil Co. subsequently monopolised oil processing as well as the distribution areas within the USA.28 It, furthermore, controlled the entire oil industry with the aid of its thirty-seven subsidiaries. It began to swallow up competitors or drive them out of business. The Standard Oil Co.’s tactics included negotiating freight discounts from railroads, undercutting prices of competitors and controlling pipelines. By 1880, it controlled about 90% of the US oil product market through the refining sector, although it was not integrated backwards to oil production.29 As a result of lawsuits brought pursuant to the “Sherman Antitrust Act”30, the components of the company were divided into thirty-eight regional joint stock companies in 1911.31 27 Banks, 1983, pp. 6–7; Roncaglia, 1985, p. 81. 28 Tugendhat, 1968, pp. 30–31. 29 Dahl, 2015, p. 153. 30 The Sherman Antitrust Act of 1890 was the first legal measure passed by the U.S. Congress to prohibit abusive monopolies. In 1914, the Clayton Act supplemented the Sherman Act and made mergers restraining competition also illegal. 31 Loring, 1979, p. 27. Part 1 The Fundamentals of Energy Markets and Energy Companies 12 This litigation constituted a milestone in the history of the antitrust movement.32 Following the forced demerger of the Standard Oil Company, five American companies (Exxon, Mobil, Chevron, Gulf, Texaco) and two European companies (Shell, BP), known as the “seven sisters”, began dominating the world’s oil market. Even though the intensity of their dominance decreased after the establishment of OPEC in the 1960s, their influence on the developing countries rendered them predominant in the oil market. Since producer and consumer countries have rapidly accepted the strategic importance of oil as a universally significant energy resource, global economic development and growth have become immensely dependent on oil. Changes in the oil market followed by those in oil prices have affected both national economies and the world economy in a myriad of manners. The oil price is one of the most paramount indicators of economic performance. Naturally, the greater the increase in oil prices and the longer they prevail, the bigger the effect on the macroeconomy will be. The major factors affecting the world’s oil supply and subsequently the price formation include the countries’ strategic petroleum reserves33, current stock status of the producer states, the costs of production and transportation, along with the environmental factors. Moreover, the strategies and also the investment policies of IEA, the USA and the large oil companies intrinsically affect the supply of the oil. Furthermore, factors affecting price formation in terms of demand include economic development, regional conflicts, political and military activity, expectations about energy supply security and, lastly, the increase in the requirement for oil products of higher quality in the transportation sector. 32 Maugeri, 2006, p. 18. 33 Strategic petroleum reserves refer to crude oil inventories (or stockpiles) held by the government of a particular country, as well as private industry, to safeguard the economy and to help maintain national security during an energy crisis. Austin, Stable oil prices herald sea change for Strategic Petroleum Reserve, (accessed: 1 June 2019). § 1. Distinction of Energy Markets 13 Europe With respect to oil as an energy resource, the EU is dependent on non- EU nations. In correlation with economic development, oil demand is witnessing a gradual increase. It can be observed that, because oil demand forever increases globally, oil will continue to hold its strategic importance in the future. The EU imports 90% of its crude oil. It is importing nearly 40% of its oil from the nation states which are members of OPEC, such as Saudi Arabia, Libya, Iran and Iraq. The EU has attempted to protect its energy market which is dependent on external factors. Secure access to energy during a crisis is important. For this reason, the EU has made it mandatory to hold oil stocks in Member States.34 The EU Member States must maintain emergency stocks which meet at least ninety days supply to cover internal consumption for three key product groups, namely, gasoline products, middle distillates (diesel oil, gas oil and jet fuels) and fuel oil. Stocks must be readily available so that in the event of a crisis they can be allocated quickly to where they are most needed. OPEC OPEC is one of the most important actors in the world oil industry. Founded in 1960, OPEC is a cartel established by thirteen nations which are net exporters of oil and possess two-thirds of the known world oil reserves. OPEC members are divided into three main groups: founding members, full members and limited members. Founding countries are those which signed the agreement establishing OPEC in 1960 and include Saudi Arabia, Iran, Kuwait, Iraq and Venezuela. Full members refer to those nations which joined OPEC later and whose membership was approved by the founding countries and the Conference35. Finally, limited members refer to those who are not as influential as the full members and chosen by the Conference subject to special conditions. OPEC members, other than the founding members, include 2. 3. 34 European Commission, Annex to the Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, pp. 8–9. 35 OPEC Meetings of the Conference. Part 1 The Fundamentals of Energy Markets and Energy Companies 14 Qatar (1961), Libya (1962), Indonesia (1962), Ecuador (1963–1993), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Gabon (1975–1995) and Angola (2007).36 Prior to 1960, the world oil market was under the domination of the Seven Sisters37 spearheaded by the USA. It can be observed that during this period, the oil industry was structured as a natural monopoly. After OPEC was established in 1960, the monopoly of the Seven Sisters in the oil market was challenged especially by the embargo of OPEC in 1973, which targeted the territories of the USA and the Netherlands.38 Following the establishment of OPEC, new oil fields were opened to production, which enabled new companies to become market participants.39 Middle Eastern countries came to wield substantial power with the establishment of OPEC and were able to exercise more influence on the international oil companies operating within their nations. It can be argued that the establishment of OPEC increased competition by opening the market to new players. Throughout emerging markets, dominance in the oil industry has shifted to the OPEC and state-owned oil companies, such as Gazprom, China National Petroleum Corporation (CNPC), Aramco, National Iranian Oil Company (NIOC), Petrobras.40 OPEC aims at regulating and coordinating the oil policies of Member States in order to protect their individual and collective interests. It enables price stability by preventing fluctuations in oil prices 36 For more information, see: OPEC, (accessed: 1 June 2019). 37 “Seven Sisters” was a term coined in the 1950s by businessman Enrico Mattei, then-head of the Italian state oil company Eni, to describe the seven oil companies which formed the “Consortium for Iran” cartel and dominated the global petroleum industry from the mid-1940s to the 1970s: Anglo-Iranian Oil Company (today’s British Petroleum), Gulf Oil (most of which became part of British Petroleum and the other parts which joined Chevron), Standard Oil of California or SoCal (today’s Chevron), Texaco (later a part of Chevron in a merger), London headquartered Royal Dutch Shell, Standard Oil Company of New Jersey (Esso, which became Exxon) and Standard Oil Company of New York or Socony (Mobil, which merged with Exxon to become ExxonMobil). (accessed: 1 June 2019). 38 Stork, 1973, p. 14. 39 Noguera, 2017, p. 301. 40 The new Seven Sisters: oil and gas giants dwarf western rivals, content/471ae1b8-d001-11db-94cb-000b5df10621 (accessed: 1 June 2019). § 1. Distinction of Energy Markets 15 and, subsequently, aims at supplying regular, economic, efficient and stable oil to the oil consumer countries. Furthermore, OPEC also ensures the fair return to the oil market of the oil income it obtains.41 Natural Gas Market World Natural gas is a fairly clean fuel, and it is more plentiful than oil as far as energy content is concerned. North America is the largest producer and consumer of natural gas, followed by Russia. Russia holds one third of the world’s discovered reserves of natural gas; the Middle East holds another one third.42 Since 1980, natural gas has exhibited the fastest consumption growth of all fossil fuels.43 Today, natural gas ranks as the number three fuel, reflecting 24% of global primary energy, and it is the number two energy source for power generation, representing a 22% share.44 During the decade of the 1950s, natural gas originally was used solely for local purposes and comprised merely 10% of the energy consumption internationally. Since then the international use has witnessed a steady increment. The negative effects of the 1970s oil crises on the economies and air pollution resulting from increasing oil consumption constitute the most significant reasons for the increasing share of natural gas use.45 Since natural gas is susceptible of being supplied from different sources under numerous purchase conditions and the demand may require several different structures, gas systems are a complex phe- B. 1. 41 For more information, see: OPEC, (accessed: 1 June 2019). 42 Dahl, 2015, p. 213. 43 Following the oil crises which took place in the decade of 1970s, the consumption of gas witnessed a gradual increment. Since then natural gas has been considered as one of the most significant energy resources of the world. 44 World Energy Council, 2016, p. 14. 45 Reducing and/or eradicating pollution which is caused by the usage of energy is an increasingly significant issue with respect to the environmental policies. Environmentalism plays a central role with respect to the preference for natural gas, reportedly known for relatively lower polluting emissions as compared to the other fossil fuels. Part 1 The Fundamentals of Energy Markets and Energy Companies 16 nomenon. A natural gas system consists of several different layers including exploration, production, processing, transmission, distribution and consumption. Initial investment costs for natural gas systems are very high. However, their marginal costs are low.46 The general structure of these systems is determined by three main factors, namely, supply resources, transmission and distribution systems, and the market. It has been empirically observed that in order to meet the requirements of the market structure, the natural gas system is required to maintain integrity beginning from the production phase to its supply to the end users. Furthermore, a good organisational structure along with a communication network should be established in order to further the efficient operation of the system in a technically and economically viable fashion. In terms of demand, the market structure of natural gas must take into account numerous factors such as consumer composition, the deployment of flexible measures and also affordable prices in order to be accepted by the consumer. Moreover, natural gas consumption is highly seasonal, with weather being a strong driver. The most prominent feature is the strong winter peak for heating, with a much smaller summer peak for natural gas to supply electricity generation for the cooling season. Prices also show a jagged tendency, with peaks often during the winter and troughs during the off season. Inasmuch as natural gas has higher transportation costs as compared to oil, natural gas trade patterns have tended to be more regionally oriented, with regional markets in North America, South America and Western Europe.47 Europe In 2014, natural gas accounted for a significant 21% of Europe’s primary energy consumption.48 There has been a decrease on the proportion of natural gas in EU primary energy consumption. This is partly the result of the increase in renewable energy.49 Another reason for such 2. 46 Davis & Muehlegger, 2010, p. 792. 47 Dahl, 2015, p. 213. 48 Blakey, 2013, p. 3. 49 EEA, Primary energy consumption by fuel, 2017. § 1. Distinction of Energy Markets 17 temporary decrease can be attributed to the warm winter season compared to the climatic conditions in the previous years. Natural gas also plays a significant role in the EU’s plan with respect to reducing emissions and climate change. Furthermore, as compared to the other traditional energy resources, natural gas is one of the cleanest resources because it emits 50% less CO2. Due to its higher hydrogen-to-carbon ratio, the combustion of natural gas results in 25 to 30% less CO2 than is the case for oil and 40 to 50% less than for coal per unit of energy produced, depending on the process and fuel quality.50 Russia-Ukraine Gas Crises: In March 2005, it was reported that the prices and the transit costs of the supplied natural gas gave rise to a conflict between Russia and Ukraine. During the course of this conflict, Russia claimed that Ukraine had defaulted on payment for the gas that it had purchased. Ukraine illicitly and covertly deployed the particular gas stratum that was supposed to transport gas to the European continent. Even though Naftohaz, a Ukrainian oil and gas company, initially denied the claim, it later admitted to withholding the natural resource within its territory and deploying it for local purposes. However, the conflict undertook a severe turn on 1 January 2006, which was followed by Russia’s withdrawal of its gas supply from Ukraine. Furthermore, on 4 January 2006, the parties made an agreement and gas supply was subsequently normalised and continued in the same manner until October 2007. However, post October 2007, Ukraine’s debts were at issue again. Thereafter, this issue again led to disruptions in gas supply. By January 2009, the said conflict led to a multitude of gas disruptions in many European countries. 18 European countries complained that the requisite supply of natural gas to Ukraine decreased or rather wholly cut their supply.51 In 2009, the conflict continued since the parties still could not agree upon gas prices and supply. The said confrontation had major repercussions on the domains of trade, financial and energy relationships within the regions. As a result, supply security became the focal point of the agenda in the EU. Moreover, the EU authorities tried to find ways to decrease the EU’s natural gas 50 EUROGAS, (accessed: 1 June 2019). 51 Reuters, Factbox – 18 countries affected by Russia-Ukraine gas row, 2009. Part 1 The Fundamentals of Energy Markets and Energy Companies 18 dependency on Russia. Following the natural gas crises between Russia and Ukraine, issues such as the revision of energy policies, diversification of energy resources, energy transit, secure and uninterrupted energy, and determining effective procedures for solving transit disputes have become immensely significant.52 Furthermore, the EU defined areas wherein certain decisions needed to be taken and outlined concrete actions implemented in the short, medium and longer term in order to address concerns regarding secure energy supply. The EU’s new energy security strategy was based on the following key pillars53: – increasing the energy capacity and energy production in the EU, – moderating energy demand, – strengthening emergency/solidarity mechanisms including coordination of risk assessments and contingency plans, and protecting strategic infrastructure, – completing the creation of a well-functioning and fully integrated internal market, – developing new energy technologies, – diversifying supplier countries and routes, – improving coordination between national energy policies. This strategy aims at promoting a close cooperation which will be beneficial for all Member States while respecting national energy choices and is underpinned by the principle of solidarity.54 Electricity Market World Electricity is a secondary energy source. In other words, it is generated from the conversion of primary energy sources such as coal, natural gas, oil and nuclear power, but also renewable sources such as hydropower, solar energy and wind energy. Electricity is used for many purposes (e.g., lighting, heating, cooling, transportation, industrial III. A. 52 European Commission, European energy security strategy, 2014. 53 Ibid., p. 3. 54 Ibid. § 1. Distinction of Energy Markets 19 purposes). It is convenient, versatile, easy to control and non-polluting at the location of its usage, particularly when used to produce heat, light and power.55 The source of electricity varies considerably across countries and regions. Coal dominates in China, India and a number of other countries. Natural gas is the primary source for power generation in many countries, e.g., Russia, United States and United Kingdom.56 While hydropower dominates in Latin America, Europe has the highest proportion of nuclear power and renewable energy sources. The Middle East has the largest share of oil in electricity generation. North America remains the most electricity-intensive region of the world, followed by Europe, the former Soviet Union and the industrial countries of Asia and Oceania. The developing countries lag behind, especially in Africa. Such countries, however, are eager to catch up and provide very promising markets for new generation capacity.57 Inasmuch as electricity is generated from the conversion of primary energy sources, electricity markets and electricity prices are fundamentally linked to the markets for primary fuels and environmental conditions. It is essential to take into consideration the electricity generation process and the fuel markets to understand electricity markets and price mechanisms.58 Certain structural features of the electricity sector distinguish it from other energy markets. Electricity cannot be easily stored, and it requires large physical spaces. Most energy generated by electricity needs to be fully consumed immediately. Because of this, regardless of the production methods, the installed capacity of any power plant requires a capacity which can meet the highest demand. In other words, the generation and consumption of electricity should be equal with one other. Moreover, other technical parameters such as the voltage should be balanced. In the situation of an imbalance between the supply and demand for other goods, such an imbalance would usually not create a serious negative effect in the market. However, if imbalances between supply and demand cannot be managed properly within the 55 Burger et al., 2014, p. 27. 56 IEA Statistics, (accessed: 1 March 2019). 57 Dahl, 2015, p. 122. 58 Burger et al., 2014, p. 27. Part 1 The Fundamentals of Energy Markets and Energy Companies 20 electricity sector, the security of the entire system is likely to be endangered. In contrast to the other markets, a central system operator is needed in order to ensure the security of the system.59 The system operator monitors the production, the consumption and the currents. It provides the coordination needed to eliminate the prevalent imbalances between supply and demand; if needed, it increases or decreases the energy taken from the necessary production units; and also, if need be, it activates or deactivates production units. Europe In 2016, the total net electricity generation in the EU totalled 3.1 million gigawatt hours (GWh). Among the EU Member States in 2013, Germany had the highest level of net electricity generation, accounting for 19.8% of the EU total, just ahead of France (17.2%). France was followed by the United Kingdom with 10.5% of the EU total.60 Considering the distribution of electricity consumption according to sectors, the highest electricity consumption is made by the industry with a share of 40.4%. The household sector follows industry with a ratio of 28.2%. Then the service sector comes with a share of 26.7%. The share of the transportation sector in the total electricity consumption is only 2.5%.61 However, it is estimated that this will change with the advent of newly developed technologies, and the share of electricity in the transportation sector will slowly increase. According to 2016 data, thermal power plants have the highest share in electricity generation in Europe, with a ratio of 48.7%. Nuclear power plants have a share of 25.7%, which is followed by the hydroelectric power plants having a share of 12.1%. The share of the new generation of renewable energy resources, such as wind and solar energy, only amounts to 13.2%.62 The EU will continue to undertake pertinent research in the following ten years to increase the share of electricity generated by renewable energy sources to the maximum level. B. 59 Neresian, 2016, p. 36. 60 Eurostat, 2018, (accessed: 1 March 2019). 61 EUREL, 2013, p. 10. 62 Eurostat, Electricity production and supply statistics, 2015. § 1. Distinction of Energy Markets 21 Amongst the renewable energy sources, wind and photovoltaic energy are expected to grow rapidly. However, it can be argued that the classic fossil and nuclear energy power plants will keep their absolute value for a long time in the future.63 Organisational Distinction of Energy Undertakings Public Undertakings State-owned Undertakings In the widest sense, state-owned undertakings constitute companies over which, for a variety of reasons, the state exercises control.64 This definition encompasses joint stock companies, limited liability companies and also partnerships which are limited by shares.65 Friedmann defines such an organisation as “an institution operating a service of an economic or social character on behalf of the government, but as an independent legal entity, largely autonomous in its management, though responsible to the public, through government and Parliament and subject to some direction, by the government; equipped with independent separate funds of its own, and the legal and commercial attributes of a commercial enterprise.”66 State-owned undertaking is defined in the Financial Transparency Directive67 as follows: “any undertaking over which the public authorities may exercise directly or indirectly a dominant influence by virtue of their § 2. I. A. 63 Eurostat, 2018, (accessed: 1 March 2019). 64 European Union, State-Owned Enterprises in the EU: Lessons Learnt and Ways Forward in a Post-Crisis Context, 2016, p. 1. 65 OECD, OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015, p. 14. 66 Friedmann, 1954, p. 541. “Developing countries have created SOEs for many reasons: to balance or replace weak private sectors, to produce higher investment ratios and extract a capital surplus for investment in the economy, to transfer technology to strategic sectors, to generate employment, and to make goods available at lower cost.” Kikeri et al., 1992, p. 15. 67 Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings, OJ L 195, 29.7.1980, Part 1 The Fundamentals of Energy Markets and Energy Companies 22 ownership of it, their financial participation therein, or the rules which govern it. A dominant influence on the part of the public authorities should be presumed when these authorities, directly or indirectly, in relation to an undertaking: a) Hold the major part of the undertaking’s subscribed capital; or b) Control the majority of the votes attaching to shares issued by the undertaking; or c) Can appoint more than half of the members of the undertaking’s administrative, managerial or supervisory body”. In the Financial Transparency Directive68, the Commission defines public undertaking in the widest sense as any undertaking within the ambit of which the public administration can exert preponderant direct or indirect controlling influence. In this regard, the related controlling influence could be construed as a result of the ownership, financial partnership or the rules governing the undertaking.69 The presence of controlling influence can be assumed when the public administrations either directly or indirectly hold the majority of the capital of the undertaking or control the majority of the administration or organs of the undertaking. State-owned undertakings are generally organised as autonomous entities with separate legal bodies. In addition, pp. 35–37. This Directive is extended in Directive 85/413/EEC of 1985. Some previously excluded private sectors are included again. For example, water administrations, energy companies, postal administrations and telecommunication administrations, transportation and finance institutions etc. Other than that, the Commission observed that the law on insuring public property only by public insurance companies was not in accordance with the provisions of European Community Treaty. See: OJ L 152/25. It was abolished by Commission Directive 2006/111/EC (OJ L 318, 17.11.2006). 68 The most important yield of the Financial Transparency Directive is the transparency it has brought to the accounts, which, in turn, breaks the competitive advantage of public undertakings against private undertakings. 69 The public characteristic of the undertakings has gained a different dimension with the privatisation process. A privatised undertaking passes from being public property to private property as a result of privatisation. However, the state may keep the “golden share” of the privatised undertaking in some cases. Authorities in control of “golden share” may be so important that this can lead a controlling influence of public administrations over the privatised undertaking. In such a case, the privatised undertaking may be considered to be a public undertaking at least according to Article 106(1). § 2. Organisational Distinction of Energy Undertakings 23 when the public administration participates directly in the execution of an economic activity, it is considered a public undertaking.70 The scope of the public ownership in various sectors of the economy is particularly extensive in certain EU Member States such as France, Italy and Sweden, but also in certain new Member States such as Slovenia, Romania, Croatia and Poland.71 The ownership and governance practise of large undertakings active in areas such as telecommunication, transportation, energy and postal services across Europe generally fall under the category of state-owned undertakings.72 Although the rules concerning state-owned undertakings vary across Member States, issues related to state-owned undertakings such as state aid, public procurement and services of general economic interest (SGEI) are regulated at the EU-level.73 Sometimes the EU files investigations against Member States, especially in relation to state aid provided to state-owned undertakings, in order to balance competition.74 As regards company ownership in the energy sector, it can be observed that a large number of utilities are partly state-owned today compared to the situation twenty years ago, when nearly all energy utilities were fully state-owned. This demonstrates that energy sector has undergone structural changes over the last decades.75 The overall trend is clearly towards continuation of privatisation and liberalisation and, consequently, towards a decrease in state ownership. Currently, 70 For a CJ decision about this topic, see: Case 118/85, Commission v Italian Republic, [1987] ECR 2599, par. 11. “In that regard, it must be pointed out, as the Court has frequently emphasised in its decisions, that having recourse to Member States’ domestic law in order to limit the scope of provisions of Community law undermines the unity and effectiveness of that law and cannot, therefore, be accepted. Consequently, the fact that a body has, or has not, under national law, legal personality separate from that of the State is irrelevant in deciding whether it may be regarded as a public undertaking within the meaning of the Directive.” See: Gómez & Murray, p. 3. 71 Ibid., p. 6. 72 Estep, 2013, p. 3. 73 Ibid., p. 4. 74 “The European Commission has opened an in-depth probe to verify whether debt writeoffs by the Romanian State and continued supplies by State-owned enterprises in favour of Oltchim, despite the company’s deteriorating financial situation, were in line with EU state aid rules.” European Commission, State aid: Commission opens in-depth investigation into support for Romanian petrochemical company Oltchim, 2016. 75 P79FSchülke, 2010, p. 10. Part 1 The Fundamentals of Energy Markets and Energy Companies 24 only one of the “seven brothers”76 is still fully state-owned (Vattenfall).77 Municipal Utilities Municipal utilities denote the entities which are owned by a single or several neighbouring municipalities. The municipal utility refers to a commercial corporate entity which encompasses its own budget, accounting and finance system, workforce, capital tools and an independent or semi-independent management organ. These entities produce goods and services for general public consumption. There are two groups of entities: – entities in which one or more local administrative bodies have at least 50% of shares; or – entities in which the municipality retains a minority share but has special statutory powers. Municipalities are considered to be the oldest and also the most durable elements of the European administration.78 Local public companies in Member States operate in basic public services known as the network services (water, electricity, gas, waste, telecom, postal services, public transport, port and airport, etc.). Nonetheless, these companies can provide services in any area related to the general public interest. General regulations pertaining to the organisational structures or the service areas of the local public companies are not created by the EU.79 Therefore, the legal structures, organisations, service strategies and impact areas of the mentioned types of companies vary in nearly every EU Member State. B. 76 Europe’s largest electricity and gas companies: E.ON, EDF, RWE, Vattenfall, GDF- Suez, Endesa and ENEL. Thomas, 2003. 77 Schülke, 2010, p. 10. 78 Hulst & Montfort, 2007. 79 One of the most important basic principles of the EU preventing it from taking binding decisions against Member States is the Subsidiarity Principle which is set forth by Article 5(3) of the Treaty on European Union (TEU) and Protocol (No 2). The Subsidiarity Principle states that staying at the closest level to the citizens is appropriate by considering the economic efficiency principle in dealing with problems of the EU and producing public services. § 2. Organisational Distinction of Energy Undertakings 25 Within Member States, there exist local public companies which are fully owned by the municipalities and which carry out joint ventures with the private sector. These joint ventures develop in the course of partnership between the different municipalities and private companies operating internationally (particularly in the energy sector). For instance, the German municipalities Mainz, Wiesbaden and Darmstadt have established a co-operative (e.g., Kraftwerke Mainz-Wiesbaden & HEAG) in order to produce and offer basic public services so as to compete with large energy groups.80 Graz, Linz, Salzburg and Innsbruck, municipalities in Austria, have established a consortium (Citykom Ltd) in the energy and transportation areas and founded a joint venture by selling 50% of the shares to international companies. In general, the municipalities perform their duties in two distinct ways. They may have their own generation facilities and produce their indigenous power, or they may transfer energy generation activity to a third company through a contract. In both cases, the municipalities provide energy distribution locally. For example, since consumers are also local when it comes to electricity, the municipalities do not need to transmit electricity through high-voltage electricity lines. Municipal utilities are particularly present in Germany, which has more than 900 distribution grid operators, most of which belong to Stadtwerke (Municipal Utilities). Stadtwerke is constrained solely by the principle of territoriality. Furthermore, they are responsible for the operation of the local electricity networks and the distribution of energy to the local consumers. Stadtwerke can also determine its own strategies and thus may threaten the market share of main EU energy firms in Germany.81 As a consequence of the liberalisation of energy markets, numerous companies have become privatised and the new privately-owned companies have had the opportunity to enter into the market. However, recently the remunicipalisation movement has begun in Europe. The underlying reasons for this tendency are the cheaper services provided by local authorities, the private sector’s failure, reflected in high energy prices, poor service quality and the lack of addressing public 80 HEAG remained in this union until 2007 before selling all its shares. 81 Groot, 2013, p. 31. Part 1 The Fundamentals of Energy Markets and Energy Companies 26 demand for a renewable energy transition, and the termination of the concessions given to private companies.82 In Germany alone, more than 60 new Stadtwerke have been established since 2007, and privileges related to energy distribution networks and service offering have returned to public hands.83 Apart from Germany, the remunicipalisation movement can also be observed in countries such as France, the UK and Finland. Public-Private Partnerships (PPP) In a general sense, public-private partnership (PPP) can be defined as “long term contractual arrangements between the government and a private partner whereby the latter delivers and funds public services using a capital asset, sharing the associated risks”.84 PPP refers to a general term which assimilates various collaboration types between the public and the private sectors. The quality and quantity of the services which are required from the private partner are specified by the government in a PPP contract. The private partner may undertake financing, design, construction, operation, maintenance and management of a capital asset required for service delivery as well as the delivery of a service to the government, or to the public, using that asset.85 The EU acquis communautaire lacks a comprehensive PPP definition. PPP thus are characterised by the duration of the relationship between the contracting parties, the role of partners in the definition of objectives, design, completion, implementation, financing, the method of funding the project and the distribution of risks. The Commission has attempted to formalise a homogenous definition of PPP in its Green Paper on Public Private Partnerships.86 According to this document, PPP refers to forms of cooperation between public authorities and the world of business which aim at ensuring the funding, con- II. 82 De Clercq, 2014; Kishimoto et al., 2017, p. 121. 83 Hall, 2013, p. 10. 84 OECD, Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships, 2012, p. 18. 85 Ibid. 86 European Commission, Green Paper on Public Private Partnerships, 2004, p. 3. § 2. Organisational Distinction of Energy Undertakings 27 struction, renovation, management or maintenance of an infrastructure or the provision of a service. There is a dual distinction regarding PPP in the Green Paper on Public-Private Partnerships87: – Contractual PPP: PPP is of a pure contractual nature, i.e., the cooperation between the public and the private sector is solely based on the contractual links. – Institutional PPP: PPP has an institutional character; in other words, it involves the establishment of a distinct entity jointly held by the public and the private sector. The PPP mostly aims at the implementation of infrastructure projects and also the provision of public services. These classes of contracts require complex legal and financial agreements encompassing the private operators and also their public bodies. They are widely used in the transportation, energy, infrastructure, public security, waste management and water distribution sectors.88 Certain relevant studies have been conducted with pertinence to the legal framework of the PPP practices, the importance of which is gradually increasing within the ambit of the EU. Since 2000, the Commission has conducted a series of studies to define PPP, clarify its practical issues and render its practices a commonality.89 The results of these studies constituted the origin of the basic legal framework of PPP. With respect to this term and its scope, the Directives regulating public procurement90 have been modernised. Directive 2014/24/EU91, 87 Ibid., p. 44. 88 Talus, 2009, p. 43. 89 ENISA, Desktop Research on Public Private Partnerships, 2011. 90 Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts, OJ L 134, 30.4.2004, pp. 114–240. Directive 2004/18/EC has been repealed by Directive 2014/24/EU. Directive 2004/17/ EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors, OJ L 134, 30.4.2004, pp. 1–113. Directive 2004/17/EC has been repealed by Directive 2014/25/EU. 91 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC, OJ L 94, 28.3.2014, pp. 65–242. Part 1 The Fundamentals of Energy Markets and Energy Companies 28 which regulates classic public procurement, and Directive 2014/25/EU92, which regulates energy, transportation, water and postal services, have been implemented. Directive 2014/24/EU introduced a new procedure, designated as “competitive dialogue”, allowing the public authorities to hold discussions with the applicant businesses in order to identify the solutions best suited to their needs. In this context, a platform was created at the initiative of the Commission to determine how and to what extent public procurement Directives can be applied to different types of PPP forms, to clarify the current legal framework with respect to the PPP models and to decide whether they need to be elaborated. During the consultation process it was determined that sufficient competition was not given in most of Member States. It was also emphasised that alternative policies and regulations ought to be developed in order to solve the numerous problems associated with public procurement and privileges. Different partnership regulations aim at transferring the activities which normally constitute the responsibilities of the governments. This course of action is a manner of attracting private sector financing to the public sector. A number of reasons can be given for the increasing interest in partnerships between the state and the private sectors, including expected efficiency gains, limited effect on the budget and private sector know-how. The effect on budgeting is especially important for the most recent EU Member States and the candidate countries. This fact also reflects a deep transformation in the ideology at the foundation of the state’s role from a direct operator to a supervisor and regulator. The paradigm shift from state to market creates an economy financed and operated by the private sector. The role of the state in such an economy is to enable the functioning and reliability of the system. As a result of the studies conducted by the EU to create a fully liberalised internal market with a free competitive environment, the importance of PPP gradually is increasing.93 92 Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC, OJ L 94, 28.3.2014, pp. 243–374. 93 “The financial crisis has had a major impact on the capacity of European businesses and governments to finance investment and innovation projects. To accomplish its objectives for Europe 2020, a regulatory environment that renders financial markets both effective § 2. Organisational Distinction of Energy Undertakings 29 Privately Held Undertakings A privately held entity refers to a commercial enterprise that is owned by private investors. The developments in the direction of the free market economy worldwide have influenced the restructuring of the public sector. The most effective tool to reduce the role of government in the national economy is privatisation. Today, the provider of energy services is not always a state-owned company, as the task can also be entrusted to private undertakings.94 The advent of liberalisation throughout the last decades paved the way for a far more critical role for the energy industry. The energy sector was characterised by natural monopolies. In order to open the energy sector to competition, a restructuring of the sector was necessary. Over the last 30 years many countries have drastically reduced their share of state ownership in the energy sector. Therefore, the governments’ role in the energy sector has been limited in the last decades. In many countries, strenuous efforts are being made to privatise state-owned undertakings and to put both the development and the production processes into private hands.95 According to Proedrou, the private energy companies that have emerged cannot be treated analytically in the same way as state-owned and state-controlled companies. These new actors are autonomous players in the market, driven foremost by their interests in survival and economic profitability. Since they have to serve their shareholders’ interests, their policies, interests and strategies frequently deviate from those of their governments.96 III. and secure is key. Europe must also do all it can to leverage its financial means, pursue new avenues in using a combination of private and public finance, and in creating innovative instruments to finance the needed investments, including public-private partnerships (PPPs).” European Commission, Europe 2020 – A strategy for smart, sustainable and inclusive growth, 2010, p. 20. 94 Penttinen, 2014, p. 264. 95 Strange, 2009, p. 53. 96 Proedrou, 2012, p. 50; Strange, 2009, p. 143. Part 1 The Fundamentals of Energy Markets and Energy Companies 30

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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.