Kroes keurt fusie Deense energiebedrijven goed onder voorwaarden - vraag en antwoord (en)

(see also IP/06/313)

What is the link between this case and the on-going inquiry in the energy sector?

The European Commission launched an extensive sector inquiry in June 2005 to analyse the functioning of the gas and electricity markets in Europe and to identify evidence of competition law infringements (see IP/05/716 and MEMO/05/203).

The preliminary report of the ongoing sector inquiry, published on 16th February (see IP/06/174 and MEMO/06/78), identified a number of problems in the energy sector. The preliminary report shows that the lack of liquidity on wholesale markets, in particular on gas trading hubs, as well as the difficulty in accessing storage in several markets, are key issues that need to be solved to promote effective competition.

In addition, a consolidation of the gas and electricity sector is currently taking place in Europe and several large scale mergers have been announced. It is therefore essential to ensure that these mergers do not undermine the liberalisation process by creating monopolistic and non-competitive market structures.

Nevertheless, under the EU merger control Regulation, each merger case must be assessed on its own merits, and the Commission has carried out a thorough assessment of the markets affected in this case, and of the impact of the remedies. It is important to note that the assessment of the competition concerns and remedies took place against a background of fully liberalised Danish energy markets, along with fully structurally unbundled transmission networks.

DONG has offered remedies which address the concerns raised by the Commission in this case, and which are also in line with the problems identified in the sector inquiry: the storage divestiture and the gas release remedies offered by DONG will maintain and further support the development of competitive Danish energy markets.

What exactly is unbundling and which pro-competitive effects does it bring about?

Supplying end customers with gas or electricity involves a number of different economic activities, which constitute the gas and electricity supply chain. Gas has to be extracted from gas fields (gas production), transported over long distances through large high-pressure pipelines (gas transmission) and (except in the case of the largest customers) transported to final customers over smaller medium- and low-pressure pipelines (gas distribution). Finally, the volumes of gas flowing in the networks at any given moment have to be managed, which in most cases takes place through the storage of that gas. The gas flowing in the above-mentioned infrastructure is supplied to and traded by wholesalers and supplied to various types of end customers (wholesale and retail supply of gas). A very similar supply chain also applies to electricity except that electricity cannot be stored. The entirety of these activities is either conducted by vertically integrated or by independent undertakings.

The current EU gas and electricity liberalisation Directives require an accounting-level and legal unbundling of network activities of transmission, distribution and storage from production and supply activities. This means that, in a vertically integrated undertaking, these activities have to be carried out by different subsidiaries and separate accounts must be established. The essential objective of such unbundling provisions is to ensure that any company can have access to the gas infrastructure (transmission and storage for instance) at the same conditions as the vertically integrated undertaking provides to its own operations so as to be able to compete with the latter for the supply of gas to end customers.

In Denmark, the gas transmission network had previously been structurally unbundled from DONG and is now operated by a fully independent state owned entity, Energinet.dk.

In the DONG takeover case, one of the remedies offered by DONG will bring about the complete ownership unbundling of one of the two Danish gas storage facilities which will establish a second, independent player on the Danish storage market and thereby remove the competition concerns regarding gas storage and flexibility and create conditions for competition in the provision of gas storage services in Denmark.

What exactly is a gas release programme and how can it contribute to solving competition concerns?

The gas release programme committed to by DONG aims to give new entrants access to the Danish wholesale gas market and increase the liquidity and competition thereof in the form of a two-stage auction process, consisting of a swap-based preliminary auction and a cash settlement-based secondary auction.

The preliminary auction is based on a swap transaction, which is a novelty in the structuring of gas release programmes. In this programme the party successfully acquiring lots in the auction delivers gas to DONG at one of potentially four northern European gas trading points or hubs[1], while at the same time DONG delivers the same volume of gas to the party at the Gas Transfer Facility (GTF), the Danish virtual exchange point for natural gas. Thus DONG and the counterparty are exchanging gas volumes available at different European trading points. Any undertaking interested in acquiring the gas quantities in Denmark in exchange for quantities at the other European trading points may participate in the auctions and place bids to enter into 2-year gas swap contracts with DONG. DONG will offer a fee to the participants to compensate for the price differences between the different delivery points. The final swap fee will then evolve in the course of the auction process. There are six auctions to be held, starting in 2006, each with a volume of 400 million cubic meters divided into ten separate lots.

In the case that not all lots are swapped in the primary auction in any given year, the secondary auction ("standard gas release") is triggered, whereby volumes are sold against cash settlement. The secondary auction thus has varying volumes depending on the number of unswapped lots, but will also result in 2-year gas-delivery contracts.

The two stages of the gas release programme will free up gas quantities equivalent to 10% of total Danish gas consumption in 2005 and will therefore significantly increase the liquidity of the Danish gas markets compared to the situation pre-merger. The terms of the gas release programme will furthermore enhance the flexibility tools of DONG's competitors and free up contractually locked-in customers. The remedy is therefore appropriate as it addresses many of the competition concerns on gas wholesale, storage/flexibility and retail markets identified by the Commission during its investigation into the proposed DONG takeover.

The combination of gas release and the storage facility divestiture will ensure that DONG's competitors have access to both independent storage infrastructure and gas supply at competitive and non-discriminatory conditions, thereby establishing the level-playing field required for the development of a fair and undistorted competition.

What is the reason that the gas release programme is of lower volumes and shorter duration than the programme agreed to in the E.ON/MOL case?

The gas and contract release remedy offered in the E.ON/MOL case (see also IP/05/1658) totalled between 10 and 14% of Hungarian consumption over 8 years. Thus the DONG gas release is somewhat smaller in terms of volume and duration as it amounts to 10% of Danish consumption and runs for a total of 7 years based on 6 yearly auctions.

This is because there are significant differences between the two cases and the market environment in which they operate. The Hungarian market is not yet fully liberalised and MOL has an almost monopolistic role on the wholesale gas market, whereas the Danish gas and electricity markets are fully liberalised and there are already today other players than DONG active on these markets.

The slightly shorter timeframe of the release program in the Danish case can also be seen against the specific circumstances in the Danish market, including the Danish gas reserves and DONG's upstream contracts. (see also the Commission's DUC-DONG antitrust case - IP/03/566).

Why is the Commission approving a national concentration while it expresses concerns about developments in the energy sector at the same time?

The liberalisation of the regulatory framework in both the gas and electricity sectors in Denmark is among the most advanced among the Member States. All customer groups have been able to freely choose their electricity supplier since 2003 or and their gas supplier since 2004. Furthermore, the transmission network has been fully unbundled in both sectors and since 2005 a single, independent state-owned company Energinet.dk operates the transmission systems under a regulated third-party access regime.

In addition, the commitments offered by DONG should have pro-competitive effects. The storage divestiture should help to alleviate the infrastructural advantage of the incumbent, and the gas release remedy coupled with the transparent and unrestricted access to the Danish gas transmission system will preserve the pre-merger competitive situation by facilitating new entry into the Danish gas markets.

Finally, although technically and legally a separate matter, the overall transaction will as far as the electricity markets in Denmark are concerned create a new, viable entrant on the Danish wholesale markets, through the divestiture of certain power plants to the Swedish state-owned electricity incumbent Vattenfall (see IP/05/1706).

Thus the Commission's decision to approve this concentration should be seen against these circumstances which have ensured that the market structure remains sufficiently open and liquid after the proposed merger, thereby creating the framework for competition in the Danish energy sector.

What is the difference between this case and the EDP/GDP merger which was prohibited by the Commission?

There are very important differences between this case and the EDP/GDP merger blocked by the Commission in December 2004 (see IP/04/1455).

First, the commitments offered by GDP and EDP were clearly less significant than the structural changes brought about by DONG's commitments and the divestiture of Danish power plants to Vattenfall. In particular, with respect to the Portuguese electricity markets, the proposed remedies were clearly insufficient whereas DONG's asset swap agreement with Vattenfall will result in an important new entry in Danish electricity markets.

Secondly, the Portuguese merger would have created a company with much larger market shares than is the result of this case. The Portuguese gas monopolist GDP had a 100% share in the wholesale market and the merger would also have resulted in a 100% share in the retail market as well. DONG's market share in the Danish gas wholesale market is 80-85%, and even lower in the retail markets. Contrary to the situation in Denmark, the Portuguese gas market was at the time not liberalised. As to the electricity market, even though it was opened to competition already, EDP still had a share of between 80-100% in the electricity wholesale and retail markets. The evidence on likely future potential entry is of course also very case specific and varied significantly in the two cases.

Why have no competition problems been identified by the Commission in the electricity sector as a result of the concentration?

The concentration is actually likely to increase competition in the Danish electricity wholesale markets as it introduces a new market player (Vattenfall) in both East and West Denmark. As there is currently no interconnection infrastructure between East and West Denmark allowing for electricity to flow from one area to the other, Elsam and E2 did not compete directly against each other before the merger, but only competed on a broader level at the Nordic electricity exchange Nord Pool. The divestiture of power plants to Vattenfall in both East and West Denmark will therefore increase competition in the Danish electricity wholesale markets because it creates a viable competitor to Elsam and E2 respectively and reduces their market shares substantially.

On electricity retail markets, the merger will create a company with a market share of around 25-30%. However, the Danish electricity retail market is rather fragmented and there are other players with similar market shares that are well placed to compete with the new company.

What impact will this decision have of future investigations in the European energy sector (GdF/Suez, E.On/Endesa etc.)?

If and when these operations are notified, the Commission will examine them very carefully under the Merger Regulation and will conduct wide-ranging and thorough market investigations to assess their possible impact on the energy sector in Europe. Under the Merger Regulation, these and other future cases must be assessed on their own merits as regards their impact on effective competition. It is important to mention that mergers with a Community dimension cannot in any way be implemented before the Commission's clearance.

The experiences from the Danish case, and the preceding Hungarian (E.On/MOL) and Portuguese (GDP/EDP) cases, indicate the crucial importance of having a thorough look at the structural set up of the gas and electricity supply chain and at any other elements that may have a negative impact on the liquidity of the relevant markets. The Merger Regulation provides a very good framework for making this analysis, and, where relevant, to ensure that specific competition concerns are addressed through appropriate remedial action.

[1] These are the National Balancing Point (NBP) in the UK, the Title Transfer Facility (TTF) in The Netherlands, the Zeebrugge Hub (ZBT) in Belgium and the BEB Virtual Point (BEB-VP) in Germany