Where now for the EU's energy sector?
July 18th 2006

The growth of competition in the European Union's energy sector has failed to live up tothe expectations of EU officials, with member states under fire for failing to fullyimplement directives on market opening in their respective national markets. Plans forfull opening by 01 July 2007 appear excessively optimistic, and the EU has now takenmatters into its own hands

Impatience amongst the highest levels of theEuropean Commission at the slow pace ofderegulation and its impact on energy prices,and hence consumers prompted the launch oflast year's formal probe into the energy sector.

Publishing its more recent update on the probe earlierthis year, the Commission indicated that in almost allmember states imports of gas and power are notadequately developed to provide an alternative tonational incumbents, as reflected in price differencesbetween nations and a low level of cross-border trade.

This is due to a combination of poor transparency ofwholesale markets and information network access,while access to cross-border pipelines and othertransportation infrastructure is limited by preferentialtreatment clauses in contracts that pre-dateliberalisation. All of these factors serve as barriers to entry.

It was expected that the introduction of EU widecompetition would put an end to the dominance oflarge, vertically integrated incumbent companies butthis has not yet been achieved - and there is also growingconsolidation at the European level. As a consequence,national markets remain highly concentrated, whileentry into wholesale markets is limited by incumbents'control of imports and import capacity holdings.

The high level of concentration in some countries givesincumbents the ability to influence prices. Verticalintegration itself limits the wholesale market involvementof dominant incumbents, the report adds, while longtermcontracts only add to this problem of liquidity.

In the gas market, long-term contracts remain linked tooil products and prevent a trend towards market-basedpricing. On the power side, consumers do not believe thatprices in wholesale markets result from fair competition.

Since the February update, the European Commissionannounced that it was launching formal investigationsagainst 17 EU member states regarding their failure tofully implement directives on the opening of their gasand power sectors.

With the points of contention raised by the Commissionamong those highlighted above, the UK was one of the17 countries under fire, although this was for more aprocedural matter than anything else given the spreadof competition since privatisation and deregulation over15 years ago.

Much of the criticism was levied at energy companies inContinental Europe. The pressure on these suppliersintensified even further in May when EuropeanCommission officials raided the offices of severalcompanies in six EU member states.

Although the Commission refused to name thecompanies visited, Germany's E.ON Ruhrgas and RWE aswell as France's GdF and Belgium's Distrigaz were amongthe companies connected with the raids which the EUstated were unrelated to the ongoing probe.

The prospect of greater competition in the EU energysector has also taken a blow in recent months followingE.ON's 29.1 billion bid for its Spanish peer Endesa, whileFrench state-owned energy company GdF has made acontroversial 72 billion bid for Belgian gas and powergroup Suez a deal that could lead to Europe's largestgas company.

Overall, 2006 has been a busy year for the EU'sCompetition Commission, and it looks set to continue.The 01 July 2007 deadline for full competition looksalmost impossible, but the recent moves by theCommission have indicated that it does not want to waittoo long after that date to see total market opening.

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