The wacky world of ownership unbundling


After many months of debate, horse-trading and haggling, the European Union has finally delivered its Third Energy Package. Notably, the European Parliament has abandoned its commitment to ‘ownership unbundling’, i.e. the splitting off of power grids from power generation companies. Does this mean the end to European dreams of a ‘liberalized’ power sector?

I have recently switched electricity supply provider. To do so, I simply logged onto a price comparison website, entered my consumption data, found the cheapest provider, filled in a few basic details and then sat back and waited. Within a few weeks I had switched provider and received a cash reward for the privilege.

Ms. Neelie Kroes, the EU Competition Commissioner
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This freedom to choose power providers is what the European Commission would like to happen throughout Europe. For years, the European Union’s executive branch has wanted to see a power sector akin to that of Great Britain, attacking behemoths like France’s EDF, which à‚— along with other integrated energy companies à‚— has been likened to a supermarket that refuses to stock anything other than their own brands.

Ever the consumer champion, the European Commission decided that ‘national champions’ were out, and choice was in. Competition was seen as vital to open the markets and, so went the theory, drive down prices for consumers.

A key aspect of the European Commission’s liberalization attempt was ‘ownership unbundling’ and therefore, in September 2007, it proposed forcing energy companies to sell off their power networks to promote competition and lower prices by allowing new entrants into the sector.

However, in early 2008, eight countries, led by Germany and France, fiercely opposed the ‘ownership unbundling’ plan. These countries wrote a letter to the European Union’s Energy Commissioner Andris Piebalgs, arguing that they not only considered ownership unbundling to be incompatible with constitutional law and free movement of capital, but also contrary to the central tenet of the Commission’s doctrine: that unbundling makes for a more competitive market.

In June 2008, the eight countries won a concession allowing national giants to retain ownership of their networks, although management of the networks would be separate and under strict independent regulatory supervision. After almost 18 months of debate, the Third Energy Package was finally agreed last month, and the upshot is very similar to the ‘third way’ as proposed by the French and Germans.

The European Parliament therefore abandoned its insistence on full ownership separation. Instead, European countries will be able to enforce a full ownership separation of transmission networks from generating assets if they wish, but if not, the European Parliament requires energy companies to hand over electricity network operations to a fully independent body.

To ensure fair play, the Third Energy Package lays out that a ‘Chinese Wall’ should be placed between the independent transmission operator and the parent utility to encourage independence. To counter the problem of power company employees moving between their different businesses, executives moving from one branch of a firm to the other will have to wait for a given ‘cooling off’ period. Furthermore, the powers of national regulators will increase to police cross-border activities involving international utilities.

Cynics doubt the potential effectiveness of these measures, believing that the utilities, which will claim to the Commission that the grids are independent, will in reality, retain their dominant influence over them. Moreover, it is doubtful whether national regulators will take an opposing position to that of national governments when it comes to enforcing competition.

So will the abandonment of ownership unbundling lead to the abandonment of the liberalization ideal? Well, perhaps. The rush by European utilities to acquire assets in the years prior to the credit crunch may have put this particular dream to bed. The European power sector has been described as something akin to an oligopoly à‚— 60 per cent of Europe’s generation is produced by a handful of utilities: Germany’s E.ON and RWE, Spain’s Iberdrola, Enel of Italy and the state-owned Vattenfall and EDF of Sweden and France respectively.

It is now very hard for new market entrants to enter what is not an entirely level playing field. But all is not lost. There are grave doubts that ‘ownership unbundling’ would have led to lower prices in any case: vertically integrated utilities enjoy economies of scale that smaller, independent companies would not.

But as demonstrated again in recent weeks, the Commission is not afraid to take on seemingly impossibly large companies: Microsoft, Eni and Mitsubishi have all previously been caught the crosshairs of the ‘Dutch Destroyer’ Neelie Kroes, Europe’s Competition Commissioner. Last month EDF was the subject of a dawn raid on its office on suspicion that it had been abusing its dominant market position with regard to French wholesale electricity prices. If Mr. Piebalgs can’t them, perhaps Ms. Kroes can!

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