Barroso settles for second-best

The European Commissioner for Competition Neelie Kroes has stuck to her guns. At her press conference last week on the results of the energy sector inquiry she declared that "full ownership unbundling is the best way" to achieve full competition on the energy market. But her convictions have been overruled by political considerations: the calculation by Commission President José Manuel Barroso that France and Germany will block any attempt to force through ownership unbundling.

German economy minister Michael Glos, writes in European Voice this week (see page 9) that he is prepared to consider ownership unbundling (ie, forcing energy companies with generating capacity to sell off their transmission and distribution network assets) but only if other measures to ensure full liberalisation of the market have been tried and failed. He has already warned that enforced disposals might clash with Germany’s constitutional safeguards against compulsory expropriation, drawn up to guard against communist seizure of assets after the Second World War.

E.ON Chief Executive Wulf Bernotat said in an interview with die Welt newspaper last week: "According to German law Brussels’s demand [for ownership unbundling] would be tantamount to expropriation".

Berlin clearly has no intention of allowing the energy sector giants it has nurtured in recent years like E.ON and RWE (the second and fourth biggest energy firms in the EU in terms of market capitalisation) to be split up.

But the question is whether the alternative course of action, creating an independent system operator and strengthening the powers of regulators at national and EU level, would achieve the desired result of a truly competitive market. Setting a target date of 2009, the Commission says that in such a market consumers across the EU are free to choose their suppliers, and energy providers are free to operate in any member states.

The problem on the market stems from those vertically-integrated companies that own both generating capacity and the transmission and distribution networks, the pipes and wires. Often these are the operators created from the former state energy monopolies. Control over the transmission system gives companies enormous market power, particularly over new entrants, because they can exploit bottlenecks in the system to favour their downstream suppliers.

As John Mogg, chairman of the European energy regulators’ group ERGEG, says: "If you are a vertically integrated company, you’ll favour where you stick your pipes and wires, depending on where you’ve got your companies."

Many experts agree that ownership unbundling is the cleanest way to address the problem because it removes at a stroke any danger that generating firms can favour end-supplier companies through control of the transmission network. Xavier Vives, professor of economics and finance at the IESE Business School in Barcelona, says the key aim is to avoid firms combining the natural monopoly of transmission and transportation systems with the competitive activities of generation and supplying energy to end-users. "If [firms which are competing in the generating and end-supply sector] have a controlling position [in the natural monopoly] they can use bottlenecks to harm rivals."

Highlighting the results of the competition inquiry into the energy sector, Kroes said that transmission system operators were collecting "significant revenues" from congestion but were not using this money to invest in new interconnectors.

The alternative is creating so-called ISOs (independent systems operators) that, while owned by firms with generating assets, are operationally and legally separate. A model for such an ISO is to be found in Scotland where the two main power generating companies, Scottish Power and Scottish and Southern Energy Group, own the transmission grid, which is operated, in turn, by the operationally independent English National Grid company. But energy sector experts point out that the Scottish model would be hard to replicate. It resulted from the make-up of the UK and the way in which the former regional utilities companies reorganised after privatisation.

Where there is consensus among industry analysts is that, in the absence of ownership unbundling, stronger powers and greater independence for national regulators and a boost to EU-level regulation, especially over cross-border trade, are essential.

Vives supports the Commission’s bid to introduce minimum standards for regulators and increased powers over cross-border trade. "Moving towards a system of regulators with common rules makes sense. Otherwise it’s very difficult to establish a level playing field and E.ON or EdF can just control everything". He says that the idea of a single European regulator is "far-fetched" for now but common rules for regulators would be "quite an improvement".

Strengthening the powers of ERGEG has won the public support of the German government.

From the standpoint of German industry this makes sense because a level playing-field for market entry and operation in other member states would make it easier for Germany’s deal-hungry power giants to make further inroads into other member states’ markets.

It could be that Germany, despite its opposition to ownership unbundling, will be demanding greater regulation, putting France, which has an independent regulator but with relatively limited powers, on the defensive.

French Industry Minister François Loos has already responded negatively to the Commission’s plan, saying the current system with a network operator RTE separate from EdF "is working well". But the Commission has already launched an infringement procedure against France for its system of regulated tariffs, which it believes is a barrier to new entrants.

French President Jacques Chirac may have struck a deal with German Chancellor Angela Merkel to ward off ownership unbundling. But Chirac, for whom the March summit on energy will probably be his last European Council as French president, may find himself under pressure from the German government and energy companies eager to win a share of other countries’ markets.

Who has unbundled?

• ELECTRICITY

Countries with unbundled electricity sectors: Denmark, Finland, Italy, the Netherlands, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK (11)

• GAS

Countries with unbundled gas sectors: Denmark, the Netherlands, Portugal, Romania, Spain, Sweden and the UK (7)

The European Commissioner for Competition Neelie Kroes has stuck to her guns. At her press conference last week on the results of the energy sector inquiry she declared that "full ownership unbundling is the best way" to achieve full competition on the energy market. But her convictions have been overruled by political considerations: the calculation by Commission President José Manuel Barroso that France and Germany will block any attempt to force through ownership unbundling.