MERGER CONTROL IN THE MERGER CONTROL IN THE EUROPEAN ENERGY MARKETSEUROPEAN ENERGY MARKETS

A PRESENTATION BY FRANCISCO PEA PRESENTATION BY FRANCISCO PEÑÑAAVISITING RESEARCHER, HARVARD LAW SCHOOL. PhD CANVISITING RESEARCHER, HARVARD LAW SCHOOL. PhD CANDIDATE, KINGDIDATE, KING��S COLLEGE LONDONS COLLEGE LONDON

HARVARD LAW SCHOOLHARVARD LAW SCHOOLFEBRUARY 7, 2003FEBRUARY 7, 2003

OVERVIEWOVERVIEW

�� Objective: analysis of the competition policy controls applied bObjective: analysis of the competition policy controls applied by the y the European Commission over mergers and acquisitions in the energy European Commission over mergers and acquisitions in the energy marketsmarkets�� Energy liberalization processEnergy liberalization process

�� Regulatory frameworkRegulatory framework�� Merger controlMerger control

�� General patterns of the decisionGeneral patterns of the decision--making processmaking process�� Market definitionMarket definition�� Competitive assessmentCompetitive assessment�� Remedies Remedies

�� ConclusionConclusion

LIBERALIZATION LIBERALIZATION -- ProcessProcess�� Objective: a single and competitive energy market in EuropeObjective: a single and competitive energy market in Europe

�� Phase IPhase I�� Directive on the transit of electricity through transmission griDirective on the transit of electricity through transmission grids (90/547/EECds (90/547/EEC))�� Directive concerning a Community procedure to improve the transpDirective concerning a Community procedure to improve the transparency of arency of

gas and electricity prices charged to industrial endgas and electricity prices charged to industrial end--users (90/377/EEC)users (90/377/EEC)

�� Phase II Phase II �� Electricity Directive (96/92/EECElectricity Directive (96/92/EEC) and ) and Natural Gas Directive (98/30/EEC)Natural Gas Directive (98/30/EEC)

�� Unbundling: accounting separationUnbundling: accounting separation�� Access to the networkAccess to the network

�� Phase IIIPhase III�� EC proposal for a directive to amend the Electricity Directive aEC proposal for a directive to amend the Electricity Directive and the Natural nd the Natural

Gas DirectiveGas Directive (03(03/13/01) and the Amended EC proposal for a directive to /13/01) and the Amended EC proposal for a directive to amend the Electricity Directive and the Natural Gas Directiveamend the Electricity Directive and the Natural Gas Directive (06(06/07/02)/07/02)

�� Unbundling: legal separationUnbundling: legal separation

LIBERALIZATION LIBERALIZATION -- EffectsEffects

PositivePositive

�� Price reductionsPrice reductions

�� Greater choiceGreater choice

�� Improvement of the standards of Improvement of the standards of servicesservices

NegativeNegative

�� Abuse of market power: large market Abuse of market power: large market shares/features of the utilities sectorshares/features of the utilities sector

�� Increase of market power: merger activity Increase of market power: merger activity

�� Different pace in different Member StatesDifferent pace in different Member States

SolutionsSolutions

�� Effective regulation Effective regulation �� Effective merger controlEffective merger control�� Effective implementationEffective implementation

LIBERALIZATION AND LIBERALIZATION AND CONCENTRATION CONCENTRATION -- GermanyGermany

MERGER CONTROLMERGER CONTROL

�� Aim: to examine whether a merger would create a dominant positioAim: to examine whether a merger would create a dominant position itself n itself and whether it would impede effective competition significantly and whether it would impede effective competition significantly in the in the Common Market or in a substantial part of itCommon Market or in a substantial part of it

�� DecisionDecision--making processmaking process

�� Market definitionMarket definition

�� Competitive assessmentCompetitive assessment

�� RemediesRemedies

MARKET DEFINITIONMARKET DEFINITION

�� Critical to any merger assessmentCritical to any merger assessment

�� Different energy marketsDifferent energy markets

�� Oil and gasOil and gas Case No IV/M.085 Case No IV/M.085 -- ELF/OccidentalELF/Occidental

�� Electricity and gasElectricity and gas Case No IV/M.493 Case No IV/M.493 -- Tractabel/Distrigaz IITractabel/Distrigaz II

ELECTRICITY MARKETS (I)ELECTRICITY MARKETS (I)

�� GenerationGeneration: the production of electricity in power stations: the production of electricity in power stations�� TransmissionTransmission: the transport of electricity over high tension cables: the transport of electricity over high tension cables�� DistributionDistribution: the transport of electricity over low tension local cables: the transport of electricity over low tension local cables�� SupplySupply: the delivery of electricity to the final consumer: the delivery of electricity to the final consumer

�� TradingTrading: the : the purchase and sale of electricity and derivatives of electrical epurchase and sale of electricity and derivatives of electrical energy nergy from and to trading companies through commodity exchangesfrom and to trading companies through commodity exchanges

�� Network asset managementNetwork asset management: : the construction of new assets, the maintenance of the construction of new assets, the maintenance of existing assets and the operation of those assets in the most efexisting assets and the operation of those assets in the most efficient manner ficient manner possiblepossible

ELECTRICITY MARKETS (II)ELECTRICITY MARKETS (II)�� 1994: �Companies involved in the production, transport and distr1994: �Companies involved in the production, transport and distribution of ibution of

electricity are essentially active on a national basis�electricity are essentially active on a national basis�Case No IV/M.493 Case No IV/M.493 -- Tractabel/DistrigazTractabel/Distrigaz IIII

�� 2002: �Internal market? Not yet� 2002: �Internal market? Not yet� -- limited flow of electricity between limited flow of electricity between different Member Statesdifferent Member States

�� Physical constraints such as insufficient interconnections Physical constraints such as insufficient interconnections

�� The conditions of competition differ from Member State to MemberThe conditions of competition differ from Member State to Member State State

�� TransTrans--border tariffsborder tariffs�� Significant price differencesSignificant price differences�� CrossCross--border fee by the grid companies for the transmission of electriborder fee by the grid companies for the transmission of electricitycity�� Differences in electricity taxation, environmental policies and Differences in electricity taxation, environmental policies and other national other national

requirements requirements �� Imports subject to significant seasonal variationsImports subject to significant seasonal variations

Case Case No IV/M.1659No IV/M.1659--PreussenElektra/EZH;PreussenElektra/EZH; Case Case No IV/M.1803No IV/M.1803--Electrabel/EPON; Electrabel/EPON; Case Case No IV/M.1557No IV/M.1557--EDF/Louis Dreyfus; EDF/Louis Dreyfus; Case Case No IV/M.1673No IV/M.1673--VEGA/VIAG; VEGA/VIAG; Case Case

No IV/M.1853No IV/M.1853--EDF/EnBWEDF/EnBW

COMPETITIVE ASSESSMENTCOMPETITIVE ASSESSMENT

�� Analysis of the structure and market shares of the affected markAnalysis of the structure and market shares of the affected marketsets

�� Horizontal concernsHorizontal concerns

�� Vertical concernsVertical concerns

�� Overall structure of the market Overall structure of the market

�� PPotential competitionotential competition

HORIZONTAL CONCERNSHORIZONTAL CONCERNS

�� An industry structure exhibiting a high degree of horizontal intAn industry structure exhibiting a high degree of horizontal integration is egration is likely to be found in a dominant position under the ECMRlikely to be found in a dominant position under the ECMR

�� overlapping activity overlapping activity

�� significantsignificant

�� Most horizontal overlaps have been minimal (below 10%)Most horizontal overlaps have been minimal (below 10%)

VERTICAL CONCERNSVERTICAL CONCERNS

�� Vertical links between natural gas and electricity productionVertical links between natural gas and electricity productionCase No IV/M.931 Case No IV/M.931 -- NESTE/IVO NESTE/IVO

�� Vertical links between electricity generation and transmissionVertical links between electricity generation and transmissionCase No IV/M.1659 Case No IV/M.1659 -- Preussen Elektra/EZH Preussen Elektra/EZH

�� Internal trading between the generation and supply businessesInternal trading between the generation and supply businessesCase No IV/M.Case No IV/M.13461346 -- EdF/London ElectricityEdF/London Electricity

�� Vertical integration of distribution and supplyVertical integration of distribution and supplyCase No COMP/M.1949 Case No COMP/M.1949 -- Western Power Distribution/HyderWestern Power Distribution/Hyder

REMEDIES (I)REMEDIES (I)

�� Among the total sample of 69 concentrations reviewed over fourAmong the total sample of 69 concentrations reviewed over four--year year period, only in the following cases did the relevant regulatory period, only in the following cases did the relevant regulatory body impose body impose conditions on the mergerconditions on the merger�� Cases Cases Neste/IVONeste/IVO; ; EdF/Louis DreyfusEdF/Louis Dreyfus; ; VEBA/VIAG; RWE/VEW; VEBA/VIAG; RWE/VEW;

EdF/London Electricity; Endesa/Iberdrola;EdF/London Electricity; Endesa/Iberdrola; EdF/EnBW; Enel/ Wind/Infostrada; EdF/EnBW; Enel/ Wind/Infostrada; Hidrocantabrico/Grupo Villar Mir/EnBWHidrocantabrico/Grupo Villar Mir/EnBW

�� TypesTypes�� Structural Structural �� Behavioral Behavioral

Preference of structural remedies to behavioral onesPreference of structural remedies to behavioral ones�� EC Notice on remedies EC Notice on remedies �� Gencor v Commission (CFI, 1999) Gencor v Commission (CFI, 1999)

REMEDIES (II): REMEDIES (II): Case IV/M.1853 Case IV/M.1853 -- EdF/EnBWEdF/EnBW

(OJ L 059, 28/02/2002)(OJ L 059, 28/02/2002)

�� EdF agreedEdF agreed

�� to make available to competitors 6,000 MW located in France to make available to competitors 6,000 MW located in France �� 30% of the 30% of the eligible marketeligible market

�� to renounce its voting rights in Compagnie Nationale du Rhone anto renounce its voting rights in Compagnie Nationale du Rhone and withdraw d withdraw its representative from the CNR board of directorsits representative from the CNR board of directors

�� EnBW divested its 24EnBW divested its 24--percent shareholding in WATTpercent shareholding in WATT

CONCLUSIONCONCLUSION

�� Merger control has been used in European energy marketsMerger control has been used in European energy markets

�� to avoid the increase of market power ( �the creation or strengtto avoid the increase of market power ( �the creation or strengthening of hening of dominant position�), but also dominant position�), but also

�� to enhance liberalization to the extent that most remedies appeato enhance liberalization to the extent that most remedies appear to be clear r to be clear acts of liberalizationacts of liberalization

�� With merger control, European and international investors have bWith merger control, European and international investors have been less een less reluctant to provide needed capital for supporting mergers and breluctant to provide needed capital for supporting mergers and building uilding needed infrastructure.needed infrastructure.