Toespraak commissaris Kroes over het creëren van een concurrerende Europese energiemarkt (en)

SPEECH/07/582

Neelie Kroes

European Commissioner for Competition Policy

Building a competitive European energy market

Madrid Energy conference (in homage to former Commission Vice-President De Palacio)

Madrid, 1st October 2007

Ladies and Gentlemen,

I am honoured to speak at this conference dedicated to the memory of Loyola de Palacio. I am sure that all those who met her and worked with her were touched by her strength of personality, the clear and direct way she got her message across, her work ethic and her sheer determination to do a job well. Loyola will be remembered as a role model not only for many women in Spain but also right across Europe. She combined all these qualities with a staunch pro-European outlook, which quickly made her a very influential Commissioner and indeed the first female Vice-President of the European Commission.

Under Loyola's leadership, European energy policy made great strides, including the highly important second liberalisation package in 2003. This introduced competition for all customers and legal unbundling of network companies, established energy regulators in all Member States and facilitated cross-border trade. The package of proposals which the European Commission has now brought forward to complete the process of liberalisation in European energy markets is a fitting tribute to Loyola's memory.

The EU energy sector

Completing this process of liberalisation is key to achieving our goal of a well-functioning competitive internal energy market. It is also essential for delivering security of supply, sustainability and cost-reflective prices, all of which will allow us to respond to future energy challenges.

Through the efforts of Loyola de Palacio among others, the EU has gradually liberalised its energy markets over the last decade, and our energy markets have indeed undergone major changes. But it is clear that they are not yet working as well as they should. In 2005, I launched a detailed inquiry under competition law to understand why liberalisation is neither producing benefits for consumers in terms of greater choice and cost reflective prices, nor resulting in an integrated EU energy markets.

This inquiry uncovered three major structural deficiencies.

First, many energy markets are too highly concentrated and lack liquidity. Secondly, there is a disappointing absence of cross-border integration and cross-border competition. And thirdly, there is insufficient unbundling of network and supply activities.On top of these structural problems, there is a lack of transparency, for example with respect to available transport capacity, resulting in disadvantages for everybody except the incumbents. As a result, there is limited trust in the pricing mechanisms. When prices do not react to changes in actual supply and demand, security of supply and investment in alternative energy sources is threatened. And at the end of the day, consumers cannot be confident that the prices they are paying reflect real costs.

Looking at the first issue of high market concentration, markets have remained national in scope, with little new entry. On many markets, the incumbents have market power, and so can impose high prices.

New players face considerable problems when trying to enter the markets - not least because markets lack liquidity. Such foreclosure effects can be aggravated by vertical integration of generation and supply and by long-term contracts. Both reduce trade on wholesale markets.

Let us turn to the second issue: cross-border integration. Many of Europe's electricity interconnectors are chronically congested. Differences in energy prices across the EU are not eroded through import competition, since incumbents tend to stick to their home markets.

Different market designs between Member States contribute to these problems. Insufficient powers and limited coordination between energy regulators have created a "regulatory gap", undermining cross-border supplies and investment. Restricted cross-border cooperation between Transmission System Operators has also slowed the development of a true EU market.

The third issue that I would like to stress is the insufficient unbundling of network and supply activities. Let me briefly elaborate on this crucial point. Currently networks have to be legally separated from the supply business, but can remain within the same corporate group. This continued ownership link between the network company and supply or generation activity creates real competition problems. Let me explain why:

When networks are controlled by incumbent suppliers, they can be used to control the supply market. The networks are the gateway to supply markets. It is, therefore, no surprise that we found that many incumbents view their networks as strategic assets which they use to distort competition in their favour.

Worst of all, the close connections between network and supply lead to distorted investment incentives. Investments are only made when they are profitable form the perspective of the overall group, and not when they are just good for the network. This investment failure is a major obstacle to new entry and a threat to security of supply.

Legal unbundling therefore creates inherent and damaging conflicts of interest. The Commission has therefore brought forward concrete legislative proposals to move from purely legal unbundling to structural unbundling separating the ownership of networks from supply business.

New energy package

The proposed measures will give a fresh impetus to competition in the European energy markets.

The preferred option for ensuring the effective separation of network activities is Ownership Unbundling. As an exception, vertically integrated companies may alternatively choose to establish an Independent System Operator.

Ownership unbundling is the simplest and clearest way to achieve effective unbundling. There are two main ways this measure could be implemented, either selling the network business or supply business to a third party, or splitting the shares of the integrated company into separate shares for the network company and the supply and production business provided of course that effective separation is achieved.

Under the alternative Independent System Operator model supply companies would continue to own the networks. But all activities related to the network, including investment, would be transferred to a completely independent operator subject to detailed regulation and extensive supervision. Such an Independent System Operator which is entrusted with all relevant functions relating to the network achieves effective unbundling, albeit in a more complex and burdensome way.

The benefits of effective unbundling

On the basis of the evidence we have collected and analysed, I 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. This is a key issue, because Europe will need to invest € 900 billion during the next 25 years for new electricity generation alone. Investments on this scale can only be provided by the market. And investors will only invest their money when non-discriminatory treatment is guaranteed. 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.

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

Reforming our energy markets is on urgent priority. It is today and not tomorrow that we must take difficult decisions in this regard, building on Loyola de Palacio's legacy. The European Commission's proposals provide a sound and stable basis for a single competitive EU energy market ensuring cost-reflective pricing for customers and secure and clean energy supplies. I am convinced that these are goals worth fighting for.

Ladies and gentlemen, effective unbundling is a necessary condition for creating competitive energy markets. But it is not the only one. Strong and consistent regulation will also be required. Moreover, cross-border co-operation between regulators and TSOs needs to be improved. That is why the Commission has put a comprehensive package on the table, and why I urge the co-legislators to proceed quickly to its adoption.

And I can assure you that the European Commission will also continue to use all its powers under the competition rules to accompany and complement this reform process. A competitive and well-functioning internal market in energy is worth fighting for.