EC Opens German Electricity Market to Competition

November 28, 2008 // Published as a news service by IHS

The EC had been investigating E.ON because of concerns that the energy giant may have withdrawn available generation capacity from the German wholesale electricity markets in order to raise prices, as well as deterred new investors in generation.

Furthermore, the EC was concerned that E.ON may have favored its production affiliate for providing balancing services, while passing the resulting costs on to final consumers, as well as prevented other power producers from exporting balancing energy into its transmission zone.

The Nov. 26 decision makes legally binding the sell-off commitments offered by E.ON to address these concerns raised in the course of an investigation under EC Treaty rules prohibiting the abuse of a dominant market position (Article 82, see MEMO/06/483).

"This unprecedented set of remedies will fundamentally change the landscape of German electricity markets and bring the prospect of more competition and more customer choice. For the first time in European antitrust history, a company is divesting very significant assets to address competition concerns," said Neelie Kroes, EC competition commissioner.

"More than 20% of generation capacity will be available for competitors and newcomers and should have a positive impact on electricity prices to the direct benefit of consumers. The divestiture of the network will remove the ability of E.ON to use control of the network to favour its own production affiliate over its competitors."

In the course of its investigation, the EC came to the preliminary view that E.ON might have infringed EC Treaty rules on the abuse of a dominant market position (Article 82) in two ways:

• First, as a wholesaler on the electricity market, by deliberately not offering for sale the production of certain power plants that was available and that it would have been economically rational to sell, with a view to raising prices. Moreover, the EC had concerns that E.ON devised and implemented a strategy to deter third parties from investing in electricity generation.

• Second, as a transmission system operator, in the secondary electricity balancing market, by balancing energy in its last-minute electricity supply to maintain the frequency of the current in the network. The EC had concerns that E.ON was favoring its own production affiliate, even if it charged higher prices, passing on the increased costs to the final customer, and that E.ON prevented other power producers from selling balancing energy into the E.ON markets. This second case exemplifies the general concerns the EC expressed in the sector inquiry on the consequences of vertical integration in this sector.

To address the concerns in the first case, E.ON proposed to divest about 5,000 megawatts of generation capacity from different types of technologies and fuels in Germany, including hydro-electric, lignite, hard coal, gas, pump storage and nuclear. These sales will not only remove the ability of E.ON to withdraw capacity in order to raise prices, but also will provide generation capacity to competitors.

To remedy the EC's concerns in the second case, E.ON proposed to divest its transmission system business consisting of an extra-high voltage (380/220 kV) line network and system operations currently run by E.ON Netz. This will remove the incentive of the operator of that network to favor a particular supplier.

E.ON will carry out the sale of its assets under the supervision of a trustee, who will verify, in particular, that none of the acquisitions would raise competition concerns. A number of further requirements have to be met by the potential buyers of the assets to be divested. All buyers have to be approved by the EC.

Background
In 2006, as a follow-up to the energy sector competition inquiry, the EC initiated investigations into the German electricity market (see MEMO/06/483).

On June 12, 2008, the EC consulted interested parties on the commitments proposed by E.ON to address the EC's concerns of anticompetitive behavior in the German electricity market (see MEMO/08/396). The respondents confirmed that the commitments were necessary and proportionate to remedy the concerns.

The EC's Nov. 26 decision (a so-called "commitment decision") is based on Article 9 of Regulation 1/2003 on the implementation of the EC Treaty's competition rules.

This decision, which does not come to a finding on an infringement, legally binds E.ON to the commitments it offered and ends the EC's investigation.

If E.ON were to break its commitments, the EC could impose a fine of up to 10% of E.ON's total turnover without having to prove any violation of the EC Treaty's competition rules.

Source: European Commission.