Commission threatens EU power giants[fr][de] 

The 16-month probe into Europe's energy sector confirmed that there are still "serious competition problems" and that customers are suffering as a result. 

Kroes highlighted the following market flaws uncovered by the sector inquiry: 

• Market concentration: In countries such as France, Belgium, Poland and Hungary, incumbent operators reflecting the "old market structure of national or regional monopolies" continue to dominate around 95% of the gas market, thanks to their control over imports or domestic production. And, in the electricity sector, incumbent generators still "have scope to exercise market power by raising prices", the report indicates. 
• Vertical foreclosure: The current system, in which incumbent companies are merely asked to operate their production and supply activities through legally separate entities, means that those controlling the network pipelines can continue to be active in the supply sector. "This constitutes a major obstacle to new entry and also threatens security of supply," states the report. Network operators are suspected of limiting effective access to new market entrants and of favouring their own affiliates in the supply sector, said Kroes. 
• Chronic under-investment in the network: Vertical integration also leads to a situation where investment decisions are not taken in the interest of the network, but on the basis of incumbents' own supply interests. In Italy, for example, the national competition authority found the incumbent network operator ENI guilty of abusing its dominant position by deliberately stopping an investment project in order to benefit its supply branch by depriving competitors of access to more capacity. 

Remedies: 

• Full ownership unbundling:  

Commissioner Kroes said that breaking companies into production and distribution operations would allow other companies easier access to distribution networks, increasing competition. The Commission’s report also states that "full ownership unbundling is the most effective means to ensure choice for energy users and encourage investment". 

If accepted by the Council, it would force large companies like Germany's E.On or Electricite de France SA to split up so that businesses that generate and supply electricity would not also own the pipes and wires. 

In Britain, separation of the gas supply industry from the pipeline business, has led to a huge increase in infrastructure investments. 

But this proposal is unlikely to win support from countries such as France and Germany, which claim that maintaining strong "national champions" is the only way to reduce the EU's dependence on Russian gas. Nevertheless, so far, national champions have shown no sign of doing a better job of securing energy supplies. Gaz de France and Eni of Italy actually signed long-term contracts with Russia’s Gazprom last year, thereby making the EU even more dependent on Russian supplies. 

• Independent System Operators:  

France and Germany are likely to favour the Commission's alternative proposal, in which energy suppliers would still be allowed to own the infrastructure, but it would be managed by separate companies, called independent system operators. 

• Applying competition law:  

Kroes said that that she would make full use of powers available to her under anti-competition legislation to act against firms. This means certain companies could face large fines. 

In particular, she stressed that she would be seeking out large firms colluding to share out markets, which the report identifies as "one of the most serious threats to competition". 

She also warned that, even if the Commission's proposal on full ownership unbundling is not accepted, the Commission already has the power, under current competition law (Regulation 1/2003 ) to impose a break-up if a company’s structure creates a market abuse. The Commission has nevertheless so far never taken a decision to split a company. 

Competition Commissioner Neelie Kroes said: "This report will make uncomfortable reading for many energy companies. Underinvestment is rife, especially in networks, and customers are suffering as a result." She said that the absence of full unbundling in power markets leads to "systemic conflicts of interests", adding: "There has to be a structural solution that once and for all separates infrastructure from supply and generation. In other words: ownership unbundling." 

But Green Vice President and MEP Claude Turmes said "the promised tough line of Commissioner Kroes has been sidelined by President Barroso": "The promised action on ownership unbundling and a strong EU regulator are only options. This is a big disappointment and a gift to the German Presidency," he said, asking: "Who can imagine the German Presidency favouring a discussion in Council promoting ownership unbundling and a strong EU regulator?" 

However, Commission President Barroso, despite being often accused of siding with France and Germany, said he "very much hoped" to get summit approval for the preferred, tougher option in March. 

UK energy watchdog Ofgem welcomed the Commission's report. "The Commission's tough proposals today are good news for Britain's energy consumers who, for too long, have paid the price for a lack of real competition in continental Europe," said Ofgem's chief executive Alistair Buchanan. 

But, as expected, the French government and the majority state-controlled EDF said they were against the in unbundling of electricity production and distribution activities. 

Top German utilities E.ON and RWE also declared their opposition: "We don't think ownership unbundling would be effective. It will not automatically lead to better market conditions," RWE said. And E.ON added: "It amounts to an expropriation of our shareholders. Such radical intervention would lead to less competition and endanger security of supply in the end." 

UNICE President Ernest-Antoine Seillière said the Commission’s proposal to implement an effective unbundling system which will make third-party access a reality and "have positive effects on the competitiveness of Europe". 

Christoph Leitl, president of SME UNION, the small business task force of the European People’s Party, said that energy companies are becoming "too big and monopolistic": "The probes of the Commission clearly show that the present rules and measures have not yet achieved the objectives of liberalisation, namely real competition and a genuine choice for consumers." 

He urged the Commission to act now to make "national giants unbundle their supply and transmission divisions, to create true competition and stop blocking rivals entering the market". 

Greenpeace  regretted that a compromise option to establish 'Independent System Operators' has been added to the package, saying that such a system "would lead to confused responsibilities and conflicting interests regarding major investment decisions". Instead, it supports full ownership unbundling of utilities, which it says will help "loosen the stranglehold of incumbent coal and nuclear generators in the power sector and allow smaller, new producers – including from renewable energy sources – to distribute the electricity they generate on fairer terms".