Interview – EU Competition Commissioner Neelie Kroes on energy

Well-functioning and transparent energy markets are the best way to diversify EU energy supplies, Competition Commissioner Neelie Kroes told EURACTIV on the eve of a Spring European Summit dominated by energy issues – and controversial mergers.

Mrs Neelie Kroes is EU Commissioner responsible for competition policy

Click here to read the ‘news’ version this interview

The preliminary findings of a Commission enquiry in the gas and electricity sector, published in February 2006, identified some “serious malfunctions” in the EU internal energy market. If they are confirmed, what steps will the Commission take?

The energy sector inquiry was launched in June 2005 under the Commission’s competition powers. After having published some initial findings in an Issues Paper on 15 November, I presented the preliminary report on 16 February at an event well attended by the key energy actors. The report identifies serious shortcomings in the electricity and gas markets, which prevent them from functioning properly. 

The Commission will now make its contribution to resolving these problems by pursuing cases based on competition law. However, competition law cannot open markets by itself, and we therefore need to complement our enforcement through improved application of the legal framework.

The enquiry identified the unbundling of networks and supply activities as a major outstanding issue. Do you plan to address this with further regulation (i.e: requesting ownership unbundling as well as legal and accounting unbundling)?

One of the issues of real concern is, indeed, a market structure with bundled infrastructure and supply activities. This is a concern for all network industries where the underlying infrastructure is very costly to duplicate. Owners and operators of critical networks often compete with companies that need to have access to these same networks. Can we expect such integrated companies to treat competitors in a fully fair manner? Their own self-interest would suggest not. 

This is why there are EU rules on third party access and legal/functional unbundling. However, the sector inquiry has shown that new entrants often lack effective access to networks, the operators of which are alleged to favour their own affiliates.

Is a third liberalisation directive being envisaged to tackle remaining issues and complement the existing gas and electricity directives? What will it take for the Commission to propose a third directive?

The provisions of the second electricity and gas Directives on unbundling need to be fully implemented, not just in their letter but also in their spirit. If real progress in this respect does not develop and a true level playing field result, we will have to consider further measures.

Personally, I very much welcome the moves towards full structural unbundling (i.e. separation of the supply and retail business from monopoly infrastructures) that have been made in a couple of Member States. I believe that this will allow a more efficient market, with an improved incentive structure, to develop. Regulation can then also be made less complex and more effective. Should the functioning of the market remain unsatisfactory, this is certainly an option we will have to consider carefully at EU level.

This, and other important issues that may require legislative changes, will continue to be subject to careful analysis during the year.

The sector inquiry is continuing, and the Final Report will be published at the end of 2006. I hope to receive numerous constructive responses during the ongoing consultation period, which can help us form a clear position on the exact needs. 

Moreover, also during 2006, the Commission (under the responsibility of my colleague, Energy Commissioner Andris Piebalgs) will be conducting ‘country-by-country’ reviews of the effectiveness of legislative and regulatory measures.

All of this should enable us to have a clear picture by the end of the year, allowing us to draw conclusions on the need for any additional measures – both at Member State and Community levels – and also allowing for the possibility of submitting proposals in 2007.

Concerning the ongoing concentration movement in the energy sector, there was an approach which proved successful in the telecoms sector – the “conditional approval of mergers if the market opening commitments are strengthened“. Could such an approach be envisaged in the energy sector as well?

Market concentration has been identified by the sector inquiry as a major problem, and this makes the Community’s action under the merger regulation essential. 

It must, however, be noted that merger control is by nature reactive, i.e. the Commission does not choose its cases. Nevertheless, remedies obtained in merger cases may under certain circumstances address general market dysfunction and thus directly or indirectly contribute to addressing the various problems identified in the inquiry. While each merger case is assessed according to its specific characteristics, the sector inquiry helps to identify the most relevant criteria and the most efficient remedies in the given market environment. Naturally, such remedies can include various forms of market opening.

Big industrial electricity consumers, such as the metal industry, have complained about a lack of transparency that allows electricity producers to impose high wholesale prices that do not reflect their cost fundamentals. What do you think should be done about this?

The sector inquiry has established that there is a complete lack of timely and reliable information for both competitors and consumers. This causes both a barrier to entry for newcomers in the sector, undermines confidence in trading, and stops consumers from making informed choices. Therefore, in my view, this issue should be addressed by strengthening transparency obligations, be it through regulation or through the application of competition law.

Linked to this is the issue of price formation in the electricity market. A well-functioning and transparent market mechanism for setting prices is essential. Without it, energy markets will not function properly and will not deliver the advantages of efficiency and choice to the consumer. Price formation is, however, complex, and the sector inquiry noted that many consumers have limited trust in the price formation mechanisms.

Therefore, in the final phase of the sector inquiry, which is now taking place, we are taking a closer look at the price-setting mechanisms on electricity wholesale markets, including power exchanges. Any further measures in this area will depend on the outcome of this exercise. 

The European electricity market, currently leaves little room for smaller, ‘green utilities’ to compete on an equal footing with larger former monopolies (grid access and control on prices are mentioned as the biggest issues). How do you think such environmental considerations could be addressed by competition policy? Should specific competition rules be defined to favour ‘greener’ utilities?

As regards support to “green electricity”, there are clear rules set out in the Community guidelines on state aid for environmental protection. For example investments to promote renewable sources of energy can be supported by up to 40 % of eligible costs. These rules will be reviewed in the course of this year.

As regards new companies working in the energy sector, whether they deal with traditional electricity or could be considered as “green utilities”, no particular support measures could be envisaged. However, it is the clear objective of the liberalisation process to ensure that new companies can enter and prosper on the market, in order to increase competition and to provide a greater choice for consumers, e.g. for “green” electricity.

In case such companies face obstacles connected to the legal implementation of the relevant Directives, these could be addressed through infringement procedures addressed to the Member State. If these companies face obstacles due to abuse of dominant positions of e.g. former monopolies, this problem could be addressed by application of the competition rules.

The recent Russia-Ukraine gas dispute involved Gazprom refusing to grant Turkemistan access to its pipeline network unless the gas was sold first to Gazprom  [see related commentary from the Centre for European Policy Studies]. Could DG Competition consider taking action in this matter as the EU’s jurisdiction extends beyond its frontier where trade with the EU is affected?

The external dimension of the EU’s energy policy is of crucial importance, and we are heavily dependent on external suppliers for our energy needs. The Commission’s Green Paper on Secure, Competitive and Sustainable Energy (adopted on 8 March) considers a coherent external energy policy as a priority area.

Russia is the EU’s most important energy supplier. There is, therefore, a need for a true energy partnership with Russia, offering security and predictability for both sides, and paving the way for the necessary long-term investments in new capacity. It would also mean more open, forward-looking and predictable access to markets and infrastructure on a reciprocal basis. Such principles could be integrated into the legal framework of EU-Russia relations. Priority should also be given to rapid ratification by Russia of the Energy Charter Treaty and conclusion of negotiations on the Transit Protocol. 

An enhanced security of energy supply in the EU also requires diversification of supply. The best way to achieve this diversification is through the establishment of a competitive internal market. Competition prompts innovative solutions, as well as investment in new infrastructure and research and development leading to new technologies. As competition develops, the number of upstream producers supplying EU gas markets will continue to increase, both as regards Liquefied Natural Gas (LNG) supplies and pipelines linking Europe with new supply regions.

I believe that the combination of a well-functioning internal market and the formation of fair partnerships with our main energy suppliers, is the best way to guarantee consumers a secure access to energy at a competitive price. Where necessary, the Commission will not hesitate to use its competition powers in order to guarantee a level-playing field.

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