Has the Commission finally levelled Europe’s playing field?

E.ON has caved in to pressure from the European Commission’s commitment to ownership unbundling by agreeing to sell its power grid and some generating assets. Will this move finally open up the European Union’s electricity market to true competition?

BY TIM PROBERT

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In recent times Europe’s power industry has resembled an imperial saga in which national players are conquered by cash-rich foreign invaders. This empire building of dominant power companies has flown in the face of the European Commission’s desire for an unbundled, competitive European power market.

The Commission’s proposal that energy companies must have their production and supply activities severed from their transmission activities has proved rather a sticking point. Simply put, France and Germany (not to mention Austria, Bulgaria, Greece, Luxembourg, Latvia and Slovakia) feel that this should not apply to them. And they recently wrote to energy commissioner Andris Piebalgs to tell him so.

In the letter, the dissenters said they not only considered ownership unbundling to be incompatible with constitutional law and free movement of capital, they also considered it contrary to the central tenet of the Commission’s doctrine: that unbundling makes for a more competitive market.

So France, Germany et al proposed a “third way”. Instead of suggesting that national regulators could oblige transmission system operators (TSOs) to carry out grid and infrastructure upgrades, they proposed that regulators can “request” TSOs to invest “by all legal means”.

The dissenters insisted that fair competition can be achieved without full ownership unbundling or third-party (independent system operators (ISO)) oversight by ensuring a number of safeguards concerning the independence, management and investment decisions of TSOs.

In response, commissioner Piebalgs was steadfast in his condemnation of the third way. Utilities cannot, says Piebalgs, simultaneously control the means of energy production and transmission in an environment of effective and fair competition, and, in the absence of full ownership unbundling, the ISO option is the minimum level of separation necessary to ensure investment and access to grids for competitors and prevent conflicts of interest.

Piebalgs reminded France and Germany of the so-called Gazprom clause, a reciprocity clause on investments from outside the European Union (EU), designed to shield European firms from potential takeover bids from companies that are themselves not unbundled.

As recently as last month Johannes Teyssen, chief operating officer of E.ON, denounced what he called the Commission’s religious commitment to unbundling, saying regulators rather than companies held back investment through planning and licensing restrictions.

So it came as a great surprise to many that on 28 February E.ON announced that it has agreed to break itself up. Germany’s largest power company has offered to sell its electricity grid and end its current business model of combining power generation and transmission. It is also planning to sell 20 per cent (4800 MW) of its power plant capacity, although it could swap assets with a foreign competitor.

The reality is that E.ON was the subject of an EU antitrust probe and a deal has been done to settle the cases. In January, the Commission imposed a $58 million fine on E.ON for breaking a seal placed over a door at offices of E.ON Energie by Brussels anti-competition investigators.

E.ON’s decision is a major victory for the European Commission, in particular the “Dutch Destroyer” Neelie Kroes, the competition commissioner. Kroes believes that some integrated companies have abused their grip on grids, pipelines and other infrastructure to muscle out potential competitors.

The deal is likely to cause alarm to executives at other leading European energy groups and will almost certainly add pressure on E.ON’s rivals such as RWE and EDF to toe the line and sell transmission networks. But is this so bad?

Financial analysts expect that E.ON’s transmission business E.ON Netz, estimated to be worth more than $1.5 billion, will be very attractive to investors looking for steady, regulated cash flows. Transmission businesses have been a great success in recent years. The UK’s National Grid has seen its share price double in the past ten years, while Centrica à‚— the retail and supply company split from British Gas à‚— has seen its share price rise six-fold.

However, it is far from clear that unbundling has led to lower prices for consumers. In the UK’s unbundled electricity market, so often held up as the role model for the rest of Europe, competition has been eroded to such an extent that market regulator Ofgem is to launch an investigation into widespread 15 per cent price rises amid allegations of collusion.

Should EDF take control of Iberdrola (which owns Scottish Power), it could immediately gain control of 25 per cent of the UK’s market, possibly spelling more bad news for consumers as the ‘Big Six’ becomes the ‘Big Five’.

In Italy, which also has an unbundled market, Enel still controls close to half the total generating capacity and a much larger proportion of peaking capacity. There has been much criticism of Enel’s dominant position, and the Italian competition authority has recommended that it should be forced to sell or lease some of its power plants to market entrants to increase competition.

The Commission, the self-styled champion of the consumer, has denounced integrated companies as behaving like supermarkets that refuse to stock anything other than their own brands. Yet a fully unbundled Europe may not lead to a market in which switching electricity suppliers is as easy as choosing a new soap powder.

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