Commission vs Gazprom from the perspective of recent energy cases I

Gazprom-1.jpg

Part I: The review of settled energy cases.

The European Commission initiated a number of energy cases within the scope of its policy of energy market liberalization and provision of competition. The idea of this post is to give an overview of some of the recent energy cases initiated by the European Commission and compare them to a Gazprom case. I do not intend to go deep into the analysis, this post is just a general review that covers six energy cases and discusses possible outcomes for Gazprom.

I divided my initial paper into two parts. The first part reviews settled energy cases. The second part describes Gazprom case and compares it to the previous cases. This is the first part of my study.

Methodology

I will describe each case as follows. I will first explain the theory of harm, state the commission’s claims, provide general information about the companies involved, then discuss relevant and geographic markets, and finally, the decision and case specifics (if any). The cases I cover can be divided into two categories: downstream (customer) foreclosure cases and upstream (network) foreclosure cases. In turn, upstream foreclosure cases fall into two categories: classic and long-term booking.

Downstream foreclosure Upstream foreclosure
Classic Long-term booking
Distrigaz (2007) RWE (2009) GDF-E.ON (2009-2010)
EDF (2010) ENI (2010)

Unfortunately, there is no access to the proceeding documents of Gazprom case before the investigation is finished. However, the empirical data, experts’ comments and outcomes from the recent cases may allow us to suppose content of the relevant statements.

In this post, I will describe the cases as well as legal basis of antitrust investigations and corresponding regulatory institutions. Then I will summarise downstream and upstream foreclosure cases and in the next post I will discuss the Commission’s investigation of Gazprom.

European Commission energy investigations: from Distrigaz to Gaz de France

EU Antitrust Rules, Energy Regulations and Institutions

During the late 1990s and 2000s, the European Union takes steps towards fundamental change of the basis for the provision of electricity and gas from a monopolistic to a competitive market framework. One of the principal measures taken was the introduction of a Third Party Access regime and several unbundling provisions to diminish the risks of vertically integrated incumbents to use their monopoly power in the transmission networks. This could distort competition in the supply business and make market entry and expansion to the competitors difficult (Lowe & Pucinskatie, 2007) . Third Party Access regime obliged to create national regulators and introduce Regulations in order to facilitate cross border competition. The final aim is to establish an open single European internal market for electricity and gas.

The documents and articles that Competition law in the sphere of energy in the European Union mainly concerns are as follows.

  • Article 101 TFEU sets rules of prohibition of cartels and other restrictive horizontal or vertical agreements among companies.
  • Article 102 TFEU is about a prohibition of abusive unilateral conduct by dominant companies.
  • Articles 107 and 106 TFEU provide rules for prohibition of national governments distorting competition by the State aid (#107) or other forms of public intervention (#106).
  • Article 17 of Regulation (EC) No.1/2003 into the European Gas and Electricity Sectors applies. EU legislation regarding the Third Energy Package discusses effective unbundling of networks from upstream/downstream business, mandatory third party access and ex ante regulated network tariffs.

It should be noted that this Package contains restrictions of the rights of foreign investors in the energy sector, namely, controlled by the foreign operators of transportation systems can be certified only if they prove that their certification will not entail risk to security of supply. This measure cuts commercial incentives for the implementation of infrastructure projects for the vertically integrated parties.

The following actors and institutions are engaged in competition policy and antimonopoly regulations in the European Union:

  • DG Competition who enforces EU antitrust rules against companies and Member states;
  • National competition authorities who enforce competition rules against companies;
  • National energy regulators can enforce national energy rules adopted in terms of the Third Energy Package;
  • DG Energy monitors national energy rules and their implementation in practice, as well as institute legal proceedings against Member states in case of non‐compliance with the Third Energy Package.

Characteristics of the European gas market

According to Waktare et al. (2007), prior to a series of energy investigations, the European energy sector (primarily gas market) was characterised by a high level of market concentration. Breach of the law and abuse of a dominance position may happen where markets are vertically tied by long-term downstream contracts. Another reason why competition at the downstream level may be less effective is that at the upstream level, gas import contracts are concentrated in the hand of a few incumbents. In the gas markets, wholesale trading was slow to develop and entrants were dependant on incumbents for services throughout the supply chain. An insufficient level of unbundling between network operation as well as supply activities leads to vertical foreclosure by incumbents. In addition, there is a lack of market integration because the incumbents control primary capacity on cross-border pipelines (Waktare et al., 2007). A lack of transparency in energy markets leads to an information asymmetry between incumbents and entrants. At the same time, price formation is not effective and transparent, especially it concerns prices that are linked to oil.

Deals-inked-to-expand-Gazprom-pipeline-to-Europe.jpg

The balancing zones in the gas sector are quite segmented and have a small size, which leads to highly complex and divergent rules in each zone, while the obligation to reserve capacity at each borderline rises costs of shipping gas. This creates major obstacles for new suppliers to enter the market, which the vertically integrated incumbents have little incentive to remove. Moreover, non-transparent balancing charges, clearing costs and penalty charges contain unjustified charges that favour incumbents.

Essential facility is a network or other type of infrastructure to which access is indispensable to compete on a given market

Another important aspect we should consider before we start describing energy cases is the ownership unbundling. Ownership unbundling is ‘a separation of the previously common ownership structure between network and supply activities of a company’ (Lowe & Pucinskatie, 2007). In the result of unbundling, a separate company is created. This company owns and operates network assets. It is widely considered that the ownership unbundling improves welfare. Both competitors and the network companies are better off.

One more term is the essential facility. Essential facility ‘is a network or other type of infrastructure to which access is indispensable to compete on a given market’ (Cardoso et al., 2010).

Downstream foreclosure cases

The theory of harm for downstream (customer) foreclosure is usually characterised by the long-term exclusive supply contracts with industrial consumers by incumbents. Resale restrictions strengthens illiquidity of the market.

Distrigaz

This case was a result of investigations that focused on three gas supply contracts concluded between Distrigaz and an industrial supplier from Belgium. These contracts claimed to be competition restrictive and dominant abusive contrary to Articles 101 and 102 of the EC Treaty. Distrigaz is the largest gas supplier and importer in Belgium, the relevant and geographic markets of this case cover sales of gas in Belgium. The Commission argued that it was foreclosing downstream natural gas markets in Belgium by the means of long-term supply contracts, which were concluded with some industrial customers. The Commission was concerned that these contracts foreclose access of other gas suppliers by preventing customers from switching the supplier.

w3cT15H.png

It is important that Distrigaz offered a number of commitments and the Commission accepted them. The remedy decision was made in 2007. The commitments were the following (European Commission: Competition Cases):

  1. On average 70% of the gas volumes will return to the market each year.
  2. Maximum length of the contracts with industrial users and electricity producers is set to five years.
  3. Distrigaz undertakes not to conclude any gas supply agreements with resellers with a duration of over two years.
  4. Distrigaz pledges not to introduce use restrictions into its supply contracts.

The EDF group

In July 2007, the Commission initiated proceedings within the meaning of Article 11(6) of Regulation No 1/2003 and Article 2(1) of Regulation No 773/2004. The Commission suspected infringement of Article 102 TFEU in a form of long-term contracts between the EDF group and final consumers of electricity in France. In addition, it was concerned about including restrictions on resale in EDF’s supply contracts with large industrial customers. The markets of supply of electricity are relevant markets, while the relevant geography of the case deals with the grid on the territory of France.

The EDF group committed to make on average 65% of the volumes contracted on the relevant market every year for recontracting by alternative suppliers during the period of commitments. They also promise not to conclude new contracts that last more than five years. They expressed their readiness to comply with the commitments during the next ten years unless their market share drops below 40% for two following years. Remedy decision was made in 2010, the Commission accepted their commitments (EC: Competition Cases).

image-467358-galleryV9-zxjr.jpg

Bessot et al. (2010) argue that despite the fact that EDF’s commitments create an important antitrust development, other changes to the French electricity landscape should be made. According to them, EDF’s commitments do not address the remaining problems on the French market. They propose further actions to give alternative operators easier access to some of EDF’s existing nuclear generation in France. They believe, ‘this would create positive synergies for the benefit of the customers’ (Bessot et al., 2010).

In the final analysis of downstream foreclosure cases, one may note the following remedies:

  1. The limitation of long‐term supply contracts when the major part of volumes must come back to the market.
  2. The maximum length for the new contracts is set to two-five years.
  3. Resale restrictions are eliminated.

Upstream foreclosure cases

This type of foreclosure is also known as input or network foreclosure. In the cases considered in the present section, we will see that gas networks are essential facilities. There is a refusal to supply in various forms. Upstream foreclosure cases usually deal with capacity hoarding, margin squeeze, inadequate capacity management, strategic limitation of investments, and long-term capacity bookings by the incumbent shipper.

“Classic” Cases

The theory of harm. In this section I describe the cases of RWE and ENI. They both are vertically integrated incumbents. The cases are the subject of refusal to supply, which includes capacity hoarding (for both cases), inadequate capacity management (RWE), margin squeeze (RWE) and strategic underinvestment (ENI). Such behaviour leads to the foreclosure that harms competition and consumers.

RWE (Rhine-Westphalia Power Plant)

Rhine-Westphalia Power Plant is a German electric utilities company based in Essen, North Rhine-Westphalia. The energy company supplies electricity and gas to more than 20 million electricity customers and 10 million gas customers, principally in Europe. RWE is the second largest electricity producer in Germany (Wikipedia). The Commission concerned a potential foreclosure of RWE’s competitors from access to its gas network and a possible margin squeeze, damaging of RWE’s competitors.

832-244226.jpg

The relevant market. The Commission distinguished two markets: markets for sale (supply) of gas and infrastructure-related markets like gas transport services. The relevant geographic markets was defined as grid-wide. Regarding gas transmission, the Commission found that ‘almost all customers connected to RWE’s grid had, absent economically viable possibilities to build new connections to other pipelines (EC: Competition Cases). On the downstream gas supply markets, the chances for third party suppliers to compete with RWE were defined as very low, thus the Commission suspected RWE in holding a dominant position on the supply markets within its grid area. The case was defined as a violation of Article 82 EC Treaty by a refusal to supply and a margin squeeze.

Refusal to supply part included ‘evidence that RWE may have understated its technically available capacity and managed the scarce transport capacities on its network in a manner that prevented many competitors from gaining access to it’ (Koch et al., 2009). A margin squeeze occurs if a dominant vertically integrated firm on an upstream market charges a price for a downstream product or service that prevents competitors from accomplishing a margin that excludes them from the effective competition on the downstream market.

In order to resolve the identified concerns, RWE offered to divest its entire German gas transmission network and ‘supply the purchaser for a limited period of up to five gas years following the closing of the divestiture with auxiliary services necessary for the operation of the transmission network, such as the provision of gas flexibility services’ (EC: Competition Cases). Structural remedy decision was made in 2009. The Commission considered these commitments sufficient and accepted them.

Later on there was a wide discussion whether the Commission decision to accept structural remedies was proportionate. However, Koch et al. (2009) argue that RWE is a ‘valuable case study on the practical difficulties for energy companies to reconcile the diverging obligations to offer non-discriminatory access to competitors and to comply with unbundling rules on the one hand, and to maximise profits for the vertically integrated company on the other hand’. They believe that this precedent is a step forward on the way of liberalising European energy market.

ENI S.p.A.

Eni S.p.A. is an Italian multinational oil and gas company registered in Rome. It has operations in 79 countries, and is currently world’s 11th largest industrial company with a market capitalization of 68 billion euros (in 2013). The Italian government owns a 30% golden share in the company. The company is a component of the Euro Stoxx 50 stock market index (Wikipedia).

This case concerns ENI’s conduct on the gas transportation market to Italy and on the gas supply markets in Italy. This is another example of hindering cross-border trade and infringement of Article 102 of the Treaty, which foreclosed competition in the Italian gas supply markets by the way of a refusal to supply gas transport services to third parties.

750x-1

Regarding the relevant markets, they are almost the same as in RWE case. The Commission distinguished between markets for the sale (supply) of gas and the transport infrastructure related markets, i.e. gas transport services. For the means of analysis, the gas supply markets were divided into the markets for gas sales to wholesalers and to final customers. The relevant geographic market was defined as ‘entirety of the viable routes that a shipper/supplier could use to bring gas to the wholesale market’ (EC: Competition Cases).

The firm’s behaviour that is potentially harmful concerns capacity hoarding (refusing to grant competitors access to capacity available on the transport network), capacity degradation (granting access in an impractical manner) and strategic underinvestment (strategically limiting investment). The Commission concluded that the firm practiced these behaviours in order to protect the profits of its gas supply business in Italy by limiting gas imports by third parties into Italy, which also distorted competition and prices on the downstream gas supply markets (EC: Competition Cases).

ENI did not agree with the findings of the Commission’s Statement of Objections, however, it offered to divest its current shares in gas transmission companies in various countries as a commitment. The Commission considered the Final Commitments sufficient and they were accepted. The remedy decision was made in 2010.

Thus, in “Classic” foreclosure cases one can observe the following structural remedies:

  • Divestiture of RWE’s gas transmission network.
  • Divestiture of ENI’s share in the relevant international pipelines.

It should be noted that there were no other equally efficient remedy in these cases. At the same time, they were proportionate and there was no excessive burden. Thereby, a similar abuse is highly unlikely.

LongTerm Booking Cases

The theory of harm for long-term booking cases consists of refusal to supply by the way of long‐term bookings of the majority of the capacities on an essential facility. This leads to the preservation of the dominance on the downstream markets. The Commission’s commitment decisions on GDF (2009) and E.ON (2010) cases dealt with foreclosure issues on French and German gas markets respectively.

GDF and E.ON case

Gaz de France (GDF) was a French company that produced, transported and sold natural gas. The company was active in France, Belgium, the United Kingdom, Germany, and other European countries. The company conducted a merger of equals with fellow utility company Suez in July 2008 to form GDF Suez (Wikipedia). E.ON was a European holding company based in Düsseldorf, Germany. It runs one of the world’s largest investor-owned electric utility service providers. The company is a component of the Euro Stoxx 50 stock market index (Wikipedia). The companies jointly own MEGAL pipeline.

OLYMPUS DIGITAL CAMERA

Relevant markets. The Commission distinguished the markets for the supply of gas and the markets relating to gas infrastructure. The geographic market was defined as each balancing zone of the transport network in France (EC: Competition Cases).

The Commission found that in the period from 1975 to 2005 E.ON and GDF intentionally avoided entering each others traditional domestic markets in Germany and France with gas transported by a jointly owned pipeline. Thus, this infringement was a subject to the Article 101 of the Treaty. The Commission argued that the arrangements delayed the effects of liberalisation via consolidating of the monopolies (Battista, 2009). The very large size of the market was affected by the market-sharing agreement. Almost entire capacity on their gas networks was booked on a long-term basis, which totally prevented any operation for third party transport. The Commission defined the incumbents’ gas networks as essential facilities.

It is a well-established concept under EU law that holders of an ‘essential facility’ can be required under competition law in certain circumstances to grant access to this facility (Cardoso et al., 2010)

Thus, to provide an effective competition on a downstream market, the access to these facilities is necessary. Since the refusal leads to the distortion of competition and consumer harm, this practice is an abuse under Article 102 TFEU.

The Commission decision obliged E.ON, E.ON Ruhrgas and GDF Suez to put an end to the infringement and to abstain from repeating any act or conduct with the same or equivalent object or effect. In addition, the Commission imposed huge fines on their activities calculating them for all years from the very beginning of the infringement (1980). The resulting fines combined total of EUR 1.106 billion (Cardoso et al., 2010). It should be noted that this case did not touch long-term supply contracts with downstream customers.Only limitations of transport capacity was a subject of this case. Thus, the access of third parties to companies infrastructure was foreclosed, not the customer’s interests.

Choosing the remedies for the long‐term booking cases, the Commission pursues the following objectives:

  1. to make downstream markets contestable and increase investments incentives;
  2. to immediately release significant capacities at a mix of entry points;
  3. to make available around 50% of the long term capacity to third parties (in this case, simple grid divestiture would not solve the issue).

Foreclosure cases conclusions

So far I have covered the following types of abusive behaviour:

  • Exclusionary abuses: preventing competitors‘ access to networks (RWE, ENI, GDF Suez, E.ON gas) or to customers (Distrigas, EDF). The post did not cover CEZ case. CEZ was the case of competitor’ access prevention to production and trading.
  • Structural abuses: divestment of entire transmission systems (RWE, ENI) to independent purchasers.
  • Behavioural abuses: release of gas supply capacities (Distrigas), gas transport capacities (E.ON gas, GDF Suez), and power transport capacities (EDF).
  • Exploitative abuses (not covered but still significant for Gazprom case analysis): imposing price increases on customers (cases of E.ON Power and Svenska Kraftnät). What is important to know is that none of these cases was sanctioned with a fine, all led to binding commitments being imposed by the Commission.

Some of these remedies could have been achieved with ex ante regulation, and some even went beyond what was required by the Third Energy Package (e.g. asset divestments). Market segmentation cases such GDF & E.ON are typically not covered by ex ante regulation.One should note that several cases were closed or settled without fines after exclusion or adaptation of territorial and use restriction clauses in agreements.

Read the next part of the post, which reviews the Gazprom case.

Pavel Kiparisov

References

Battista, J., Gee, A., von Koppenfels, U. (2009) Commission imposes heavy fine on two major European gas companies for operating a market-sharing agreement. Cartels #3 – 2009. Link:  http://ec.europa.eu/competition/publications/cpn/2009_3_6.pdf

Bennett, S. (2012) The Europen Commission vs Gazprom. Wisconsin International Law Journal. Vol. 31 #4.

Bessot, N., Ciszewski M., van Haasteren A. (2010) The EDF long term contracts case: addressing foreclosure for the long term benefit of industrial customers. Antitrust #2 – 2010. Link:  http://ec.europa.eu/competition/publications/cpn/2010_2_3.pdf

Bohme, D. (2014) EU-Russia Energy Relations: What chance for Solutions? A focus on the Natural Gas Sector. Potsdam Economic Studies.

Cardoso, R., Kijewski, S., Koch, O., Lindberg P., Nagy K. (2010) The Commission’s GDF and E.ON Gas decisions concerning long-term capacity bookings Use of own infrastructure as possible abuse under Article 102 TFEU. Competition Policy Newsletter #3 – 2010. Link: http://ec.europa.eu/competition/publications/cpn/2010_3_2.pdfInternational

Competition Network:  http://www.internationalcompetitionnetwork.org/

Goldthau, A., Sitter, N. (2014) A liberal actor in a realist world? The Commission and the external dimension of the single market for energy. Journal of European Public Policy.

Financial Times:  http://www.ft.com/

Rafael Fernandez andEnrique Palazuelos (2014) A Political Economy Approach to the European Union Gas Model: Continuities and Changes. JCMS: Journal of Common Market Studies Volume 52, Issue 3

Tcherneva, V., Slavkova L., Chi Kong Chyong (2015) Europe’s alternatives to Russian gas. http://www.ecfr.eu/article/commentary_europes_alternatives_to_russian_gas311666

Gazprom Official Web Site. http://www.gazprom.com/

Eurostat. http://ec.europa.eu/eurostat

European Commission.  http://europa.eu/

Koch, O., Nagy, K., Pucinskaite-Kubik, I., Tretton, W. (2009) The RWE gas foreclosure case: Another energy network divestiture to address foreclosure concerns. Antitrust #2 – 2009. Link: http://ec.europa.eu/competition/publications/cpn/2009_2_7.pdf

Lowe P., Pucinskatie I (2007) Effective unbundling of energy transmission networks: lessons from the Energy Sector Inquiry. Web site: http://ec.europa.eu/competition/publications/cpn/2007_1_23.pdf

Roberto Grasso, John Ratliff. Unilateral conduct in the energy sector: An overview of EU and national case law // Dominance & Energy. e-Competitions National Competition Laws Bulletin. Web site:  https://www.wilmerhale.com/uploadedFiles/WilmerHale_Shared_Content/Files/PDFs/unilateral- conduct-in-the-energy-sector-2013.pdf

Russian Energy Strategy 2030:  http://www.infobio.ru/sites/default/files/Energostrategiya– 2030.pdf

Vedomosti:  http://www.vedomosti.ru/business/articles/2015/04/22/evrokomissiya- obvinila-gazprom-v-zavishenii-tsen-na-gaz-dlya-vosmi-stran

Waktare E., Kovacs K., Gee A. (2007) The Energy Sector Inquiry: conclusions and way forward. Web site:  http://ec.europa.eu/competition/publications/cpn/2007_1_55.pdf

Wikipedia. The Free Encyclopedia

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s