Toespraak eurocommissaris Kroes (mededinging) over openbreken energiemarkten (en)

SPEECH/07/574

Neelie Kroes

European Commissioner for Competition Policy

Improving competition in European energy markets through effective unbundling

Fordham Corporate Law Institute's Annual Seminar 2007

New York, 27th September 2007

Ladies and Gentlemen,

It is always a great pleasure to be invited to Fordham. I'm particularly pleased to be here this year, to open the discussion on competition in the energy sector.

Effective competition is key to opening markets and getting them to work as efficiently as possible. When markets function well, they deliver direct and concrete benefits for consumers: higher quality goods and services, at better prices. When companies are competing aggressively against each other on the basis of their respective merits, they are under constant pressure to improve, to take advantage of new efficiencies, to develop innovative products. This means more choice and better value for money for individual consumers. In Europe we have seen the evidence of this process in formerly closed network industries such as telecoms and transport.

Energy markets should be no exception to this. Our citizens rightly have high expectations of the energy sector in terms of security of supply, prices that reflect costs, and environmental considerations. So the delivery of a well-functioning competitive internal energy market has to be a top priority for Europe over the coming years. Just last week the European Commission presented ambitious and wide-ranging proposals to set this change in motion.

Truly competitive energy markets operate to deliver many benefits:

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  by ensuring cost-reflective energy prices for households and industry
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  by guaranteeing that small companies - or newcomers in growth areas like renewables - have fair access to the energy market
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  by encouraging investment in power plants and transmission networks which help to improve security of supply
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  by stimulating energy efficiency and investments and
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  by allowing the emissions trading scheme to work properly.

The European Union started its market liberalisation drive a decade ago, but considerable effort is still needed before our 27 energy mini-markets are transformed into one efficient and effective European market. I would like to use my time today to demonstrate why the reforms the European Commission has just proposed - with full structural unbundling of supply and transmission at their very core - are the lynchpin for completing this transformation. If you will permit me, I will start with a brief look at the current state of the sector and the evidence on which we base our conclusion that substantive reform is needed as a matter of urgency.

The EU energy sector

In Europe we have gradually liberalised our energy markets over the last ten years. When the process started, the market was characterised by vertically-integrated monopolies, often under the direct or de facto control of national governments.

Our liberalisation process has sought to distinguish clearly between competitive markets, such as energy supply, and natural monopolies, such as energy transport. We have encouraged competition, for example by gradually removing exclusive supply rights, and pushed for the creation of independent regulators with effective powers to supervise natural monopolies to which all suppliers have access at reasonable cost and on a non-discriminatory basis. At both national and European levels, action has been taken under competition rules where abusive practices have been at stake.

We considerably strengthened the legislative framework for liberalisation in 2003, introducing:

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  accounting, management and legal unbundling of network operators
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  the provision of network access on a regulated basis;
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  the gradual removal of exclusive supply rights and
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  the establishment of national regulatory authorities to supervise the markets and in particular access rights .

However by mid-way through the present decade, it was clear that prices were increasing, there was still very little cross-border trade, levels of concentration were high and there had been shockingly little new entry into these markets.

So in 2005 I decided to carry out a detailed sector inquiry under competition rules to understand better why the ongoing drive to more openness in these markets had neither delivered greater choice and cost reflective prices for consumers, nor resulted in anywhere near an truly integrated European energy market.

The problems this sector inquiry brought into the spotlight are:

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  first, highly concentrated markets which former incumbent suppliers still dominate
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  second, vertical foreclosure since companies use their control over the supply pipes and cables to keep rival suppliers out of the market
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  third, little cross-border trade
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  fourth, a lack of transparency concerning available capacity on pipes and cables and the forecast and actual balance between supply and demand
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  and finally, market prices that do not reflect the true supply and distribution costs of gas and electricity.

In short, there are fundamental barriers to real competition in this sector. Consumers - individuals and businesses - have been paying the price for far too long. Solutions which will deliver effective competition are long overdue.

The sector inquiry conclusively demonstrated the conflicts of interest that exist when one and the same company sells gas and electricity and controls the pipes and cables other potential suppliers need in order to reach customers. Clearly these companies have no commercial interest in allowing rival suppliers access to this essential infrastructure. This results in three problematic phenomena:

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  first, there is real discrimination by network companies in favour of their affiliated supply companies in terms of access to their pipes and cables
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  second, information about rival supply companies' business strategies "leaks" from network companies to their affiliated supply companies and
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  third, investment in additional pipe and cable capacity and interconnections is being restricted by network companies where they consider these assets would help competing supply companies rival their own affiliated supply companies.

It is interesting to compare this situation with the position in the US. Over here, you have also worked hard to introduce competition in gas and electricity markets, based on a non-discriminatory and open regime for access to the electricity and gas networks.

The creation of Regional Transmission Operators since 2000 has been essential to your transformation of the American electricity market. Some of these operators are ownership unbundled, but most are what we would consider independent system operators - or ISOs - as the operator does not own the underlying assets. But ISOs have an Achilles heel - investments. If the vertically integrated network owner remains in control of investments, incentives to invest will be distorted by supply interests. I have taken careful note of the Federal Energy Regulatory Commission's repeated concerns about the problem of under-investment by ISOs.

In the gas sector you have chosen a legal unbundling model, but the regional hubs and particularly the Henry Hub are highly liquid. It appears that one of the main reasons for this success was the renegotiation of upstream transmission contracts, which released a large amount of transmission capacity and led to a large increase in capacity utilisation in the American market.

We have looked with interest at the way you have tackled these issues over here, and have drawn some useful lessons from your experiences. In this as in so many other areas, there is a very broad degree of consensus across the Atlantic about the problems to be addressed, even if the solutions we design are not always exactly identical in every detail, reflecting our different geopolitical environment, legal tradition and culture. I would now like to present the package of solutions which the European Commission believes are the right ones to give fresh emphasis to European energy markets.

Stronger unbundling is necessary

There are two complementary threads to our work, both as essential as the other. First, strengthened enforcement of the competition rules by the European Commission and the national competition authorities. At European level we have already carried out three rounds of inspections on energy companies and have opened formal proceedings against a number of them. My colleagues in the national competition authorities have also been very active in enforcing competition rules in the energy sector. But even the most firm and proactive enforcement policy is not enough to introduce effective competition.

So legislative change is also needed, not least in order to achieve effective unbundling. Our Heads of State and Government meeting in the European Council, as well as the European Parliament, have strongly supported the objective of "effective separation" of the networks. Individual Member States have already realised this. 13 Member States have introduced ownership unbundling of transmission networks in electricity and 7 in gas.

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". Our proposals allow for it to be implemented in two ways: either by selling the Transmission System Operator or supply business to a third party, or by listing the two companies separately and replacing the shares of the integrated company with separate shares in the network company and in the supply and production company. However, in the second case effective separation unbundling will only be achieved if no shareholder has significant interests in both the supply company and the network company.

Under the Independent System Operator - or ISO - exception vertically integrated companies are allowed to maintain their ownership of network assets but the ISO is responsible for operating it. Crucially, the ISO manages all investments, and is subject to detailed regulation and extensive supervision. If the network owner does not want to finance an investment proposed by the ISO, then the ISO itself or a third party may do so. The designation of the ISO will have to be approved by the regulator and by the European Commission.

So our proposed arrangements ensure that the ISO does not have the economic ownership of the network assets, which remains part of the vertically integrated group, but is responsible for everything else. The ISO operates the network, arranges for network connections, plans and executes investments and seeks financing if the owner declines to do so. I am confident that an ISO on these lines will deliver effective separation of the network.

This arrangement of course implies a far-reaching separation within the network business itself, separating the ownership of the network from the operation of the network. It therefore introduces a new interface between the ISO, transmission owners and regulators which is critical and has to be tightly regulated. I therefore expect that many companies will see that it is in their interest to move from the ISO model to full ownership unbundling. This was the case in the UK where British Gas decided to unbundle fully. Given the lack of synergies between its unbundled businesses, it took the opportunity to end the intrusive regulation and Chinese walls required by an ISO structure.

The benefits of effective unbundling

On the basis of the evidence we have collected and analysed, we have high expectations of the benefits of ownership unbundling of transmission networks..

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  First, we expect to see increased investment in the network and in related assets such as LNG plants. The sector inquiry showed that the share of reinvested congestion revenue was about twice as high for European ownership unbundled TSOs as for integrated TSOs. All the LNG terminals planned or being built by companies other than the vertically integrated incumbents are in the UK, the Netherlands or Spain - three of the seven Member States in which the gas networks are ownership unbundled.
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  Second, we expect the market to take a very positive view of unbundled companies. Share prices - for both network and supply companies - have shown much higher than average increases. For example, £100 invested in British Gas just before it was split up in February 1997 would be worth £756 now which is significantly higher than returns from most companies in the UK. Credit ratings have been unaffected by ownership unbundling and reflect the quality of management and the financial structure - including debt levels - of the companies concerned.
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  Third, we expect concentration levels to decrease in ownership unbundled markets lower. The average market shares of the largest electricity generator in 2005 in Member States with legal unbundling were 73%. That compares to only 47% in Member States with ownership unbundling. Furthermore, in Spain, Italy and Portugal the market shares of the largest generator dropped by more than 6 percentage points following ownership unbundling.
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  Finally, we expect to see prices for end-consumers becoming more cost reflective. For example for electricity, in countries where the transmission cables are owned by the same companies as those that sell electricity, households paid over 29% more in 2006 than in 1998. The increase was just 6% in those countries where different companies own the distribution cables and sell the electricity.

The European Commission is of course aware that despite these benefits, a number of concerns have also been expressed about unbundling. Our proposals take these issues seriously and provide appropriate solutions.

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  In particular, concerns have been voiced that energy networks could be directly or indirectly controlled by vertically-integrated foreign energy companies, thereby circumventing the unbundling rules. However, the rules that we propose would apply to both EU and non-EU companies operating within the EU. All network operators will have to demonstrably and unequivocally comply with the same unbundling requirements as EU companies. The European Commission can intervene where compliance can not be demonstrated.
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  Others have expressed concern that the goal of promoting competition in well-functioning European energy markets may be contravened by economic actors that do not respect nor act in accordance with market investor principles. Taking account of the essential nature of energy networks for the economy, we consider that some restrictions are justified as concerns the ownership of transmission networks. This will mean that non-EU companies cannot own a controlling stake in an EU network unless international agreements are in place which explicitly allow for this situation.
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  We have also heard some voices alleging that unbundling would require privatisation, but this is simply not true. Our European treaties are "ownership" neutral. The same ownership unbundling rules will therefore apply to both privately and publicly owned energy companies. Where the State is the owner of an integrated company a possible solution is to transfer the shares and/or rights of either the network operator or the supply company to a foundation which is a separate legal person. In any case, where state-owned companies are concerned, the outcome must be that the decision processes of network operators and supply companies are entirely separate.
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  Just as ownership unbundling does not imply privatisation, nor does it constitute a form of unlawful expropriation. European law allows for restrictions to property rights provided these correspond to objectives of general interest and are proportionate to the objective pursued. The European Commission's proposals on ownership unbundling meet this legal test. The proposals focus on controlling interests: for most shareholders there will in fact be no objection to their continued holding of shares in both the supply and network businesses.
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  Finally, some have suggested that ownership unbundling will leave supply companies in a weaker bargaining position vis-à-vis external supplier of energy sources. But the development of a competitive internal energy market will open up new opportunities for growth by the supply business. And in any case vertically integrated companies are already obliged to grant access to the transmission network to their competitors. So their main competitive edge is not ownership of the transmission network, but a deep knowledge of their customers and markets.

Conclusion

Ladies and gentlemen,

The EU is not the only part of the world to prioritise opening up gas and electricity markets to competition. Similar efforts have also been undertaken here in the US and elsewhere. The need for effective separation of transmission networks is fully recognised on both sides of the Atlantic. I remain convinced that in the EU energy markets full ownership unbundling of transmission networks is the best way to achieve this. There is wide support for this view from consumers, new entrants, and very importantly the energy regulators.

However, this view is not unanimous and I believe that the alternative ISO model that the European Commission has also proposed will have a comparable effect from a competition perspective. Both solutions are adequate to address the problems we have identified on the basis of irrefutable evidence gathered during the sector inquiry and competition investigations. In particular, they provide a credible and lasting response to the market barriers flowing from discriminatory access to networks, leakage of information to supply companies and distortion of investment decisions.

Effective unbundling is not a magic wand. It is a necessary condition for creating integrated and competitive markets. But it cannot solve all the problems. Strong and consistent regulation implemented by strong and independent regulators will also be required. Moreover, cross-border co-operation between regulators and Transmission System Operators needs to be improved. That is why the Commission has put a comprehensive package on the table. And I can assure you that we shall also continue with effective and targeted enforcement of the EC competition rules in individual cases of abusive behaviour.

The creation of a single, competitive EU energy market will be of enormous benefit to the EU, ensuring cost-reflective pricing, secure energy supplies and a reduced environmental impact. These are goals that are worth fighting for, in the interests of all European consumers, and the European Commission intends to do just that.