EU Energy Law, Volume II: Competition Law and Energy Markets [5 ed.] 9077644679, 9789077644676

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Edited Edited byby CHRISTOPHER CHRISTOPHER JONES JONES

EU EUENERGY ENERGYLAW LAW VOLUME VOLUMEIIII

EU EUCompetition CompetitionLaw Law and andEnergy EnergyMarkets Markets LEIGH LEIGH HANCHER HANCHER ADRIEN ADRIEN DEDE HAUTECLOCQUE HAUTECLOCQUE CHRISTOPHER CHRISTOPHER JONES JONES

FIFTH FIFTH EDITION EDITION

xxv

LARS LARS KJØLBYE KJØLBYE VALÉRIE VALÉRIE LANDES LANDES FRANCESCO FRANCESCO SALERNO SALERNO LENA LENA SANDBERG SANDBERG

EU ENERGY LAW VOLUME II

EU COMPETITION LAW AND ENERGY MARKETS

Fifth edition

EU ENERGY LAW VOLUME II

EU COMPETITION LAW AND ENERGY MARKETS Fifth edition

Leigh Hancher Adrien de Hauteclocque Christopher Jones Lars Kjølbye Valérie Landes Francesco Salerno Lena Sandberg Edited by Christopher Jones

CLAEYS & CASTEELS 2019

All views expressed are strictly personal. The opinions expressed in individual chapters are those of the author in question.

© 2019 by the authors

ISBN printed edition: 9789077644676 ISBN ebook: 9789077644683

The paper and board used in the production of this book is sourced exclusively from replanted forests.

All rights reserved. This publication, in whole or in part, may not be copied, reproduced nor transmitted in any form without the written permission of the copyright holder and the publisher. Applications to copy, transmit or reproduce any part of this work may be made to the publisher.

Published in 2019 by Claeys & Casteels Law Publishers Deventer (Netherlands) P.O. Box 2013 7420 AA Deventer Netherlands www.claeys-casteels.com

Table of contents

TABLE OF CONTENTS

Part 1

Introduction..........................................................................1

Part 2

The definition of the relevant market......................................5

CHAPTER 1

Introduction.................................................................5

CHAPTER 2

The relevant product market – Electricity...................11

1. 2.

3.

Introduction........................................................................................................ 11 The supply of electricity.................................................................................... 13 2.1 Wholesale supply markets.................................................................... 13 2.1.1 Introduction.......................................................................... 13 2.1.2 Definition and scope of the wholesale market............... 13 2.1.2.1 Generation and wholesale................................ 13 2.1.2.2 Supply to large end customers......................... 14 2.1.3 Submarkets within the wholesale market....................... 16 2.1.3.1 Power exchanges and wholesale...................... 16 2.1.3.2 Distinction according to the level of distribution......................................................... 16 2.1.3.3 Regulated part of the market........................... 17 2.1.3.4 Peak hours and off-peak hours........................ 17 2.2 Retail supply to final customers.......................................................... 18 2.2.1 Supply to eligible customers and to the regulated market..................................................................................... 18 2.2.2 Distinction according to size of customers..................... 20 2.2.2.1 Sub-markets according to the customers’ size......................................................................... 21 2.2.2.2 Criteria................................................................. 23 2.3 Conclusion.............................................................................................. 27 Electricity trading.............................................................................................. 27 3.1 Introduction............................................................................................ 27 3.2 A trading market distinct from wholesale supply........................... 27 3.3 Financial and physical trade................................................................. 31 3.4 On-line trading portal products......................................................... 33 v

Table of contents

4.

3.5 Facilitation of wholesale electricity trading...................................... 33 3.6 Wider energy trading market.............................................................. 34 Network infrastructure and related services................................................ 34 4.1 Transmission and distribution............................................................ 34 4.2 Balancing................................................................................................. 36 4.3 Network asset management, operation and services...................... 38 4.3.1 Introduction.......................................................................... 38 4.3.2 Network services.................................................................. 39 4.3.3 Connection services............................................................ 40 4.3.4 Metering reading and operation....................................... 41

CHAPTER 3 1.

The relevant geographic market – Electricity..............43

Supply................................................................................................................... 43 1.1 Introduction............................................................................................ 43 1.2 Relevant criteria..................................................................................... 50 1.2.1 Entry barriers........................................................................ 50 1.2.1.1 Regulatory trade barriers.................................. 50 1.2.1.2 Transmission rules and charges....................... 52 1.2.1.3 Interconnection capacity.................................. 54 1.2.1.4 Critical size and local generation activities... 60 1.2.2 Low prices............................................................................. 61 1.2.3 Switching behaviour and customer loyalty..................... 62 1.3 Relevant evidence.................................................................................. 64 1.3.1 Dominant national companies......................................... 64 1.3.2 Actual flow of trade............................................................. 65 1.3.3 Customer switching............................................................ 68 1.3.4 Price differences between neighbouring areas............... 68 1.3.5 Different regulatory frameworks...................................... 71 1.3.6 General market structure, regional exchanges and market coupling............................................................ 72 1.4 Case-by-case examination of Member States................................... 76 1.4.1 Austria.................................................................................... 76 1.4.2 Belgium.................................................................................. 77 1.4.3 Croatia................................................................................... 78 1.4.4 Cyprus.................................................................................... 79 1.4.5 Czech Republic.................................................................... 79 1.4.6 Denmark................................................................................ 79 1.4.7 England, Wales, Scotland................................................... 80 1.4.8 Estonia.................................................................................... 84 vi

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2. 3. 4. 5. 6.

1.4.9 Finland................................................................................... 84 1.4.10 France..................................................................................... 85 1.4.11 Germany................................................................................ 86 1.4.12 Greece.................................................................................... 88 1.4.13 Hungary................................................................................. 88 1.4.14 Ireland.................................................................................... 89 1.4.15 Italy......................................................................................... 89 1.4.16 Latvia...................................................................................... 90 1.4.17 Lithuania............................................................................... 90 1.4.18 Luxembourg.......................................................................... 90 1.4.19 Malta....................................................................................... 91 1.4.20 The Netherlands................................................................... 91 1.4.21 Norway................................................................................... 92 1.4.22 Poland.................................................................................... 92 1.4.23 Portugal.................................................................................. 93 1.4.24 Romania................................................................................. 94 1.4.25 Slovakia.................................................................................. 94 1.4.26 Slovenia.................................................................................. 95 1.4.27 Spain....................................................................................... 95 1.4.28 Sweden................................................................................... 96 Trading................................................................................................................. 97 Facilitating Electricity Trading........................................................................ 99 Transmission and distribution......................................................................100 Balancing...........................................................................................................101 Network management and operation and networks services.................103

CHAPTER 4 1. 2. 3.

The relevant product market – Gas...........................105

Introduction......................................................................................................105 High and low calorific value gas....................................................................107 Gas supply..........................................................................................................110 3.1 Wholesale market................................................................................110 3.1.1 Scope of the wholesale market........................................110 3.1.2 Trading markets and hubs................................................113 3.1.3 Submarkets within the wholesale market.....................114 3.2 End (retail) customers........................................................................115 3.2.1 Power plants and large industrial customers................117 3.2.2 Small business customers..................................................118 3.2.3 Domestic customers..........................................................118 3.2.4 Regulated and open segments of the market...............119 vii

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4. 5. 6.

7.

Gas transportation...........................................................................................120 Distribution......................................................................................................120 Gas storage.........................................................................................................121 6.1 Gas storage and gas flexibility...........................................................121 6.2 HCV and LCV gas storage................................................................122 6.3 Pore and cavern storage......................................................................123 Network asset management and operation and network services.........123

CHAPTER 5 1. 2.

3.

Introduction......................................................................................................125 Gas supply..........................................................................................................125 2.1 No wider than national markets.......................................................126 2.2 Smaller than national markets...........................................................130 2.3 Trading and gas hubs...........................................................................133 Transport and storage infrastructures and related services.....................134 3.1 Gas transportation...............................................................................134 3.2 Gas storage and flexibility tools........................................................135 3.3 Network asset management and operation and network services...................................................................................................136

Part 3

Agreements, decisions concerted practices and abuse of dominance – Articles 101 and 102 TFEU.......................139

CHAPTER 1 1. 2.

4.

Introduction.............................................................139

Overview............................................................................................................139 The basic requirements of Articles 101 and 102.......................................146

CHAPTER 2 1. 2. 3.

The relevant geographic market – Gas......................125

Horizontal agreements.............................................157

Introduction......................................................................................................157 Cartels and hard-core restraints....................................................................165 Co-operation agreements between energy companies............................169 3.1 General principles and factors...........................................................172 3.1 Factors relevant to the assessment under Article 101(1) FEU...172 3.3 Efficiency defence under Article 101(3) FEU...............................175 Commercialisation of energy........................................................................181 viii

Table of contents

4.1 4.2

5. 6. 7.

Joint selling............................................................................................182 Distribution of energy by a competitor..........................................187 4.2.1 Market partitioning...........................................................189 4.2.2 Safe harbour (block exemption regulation) for unilateral distribution agreements and individual assessment............................................................................190 4.2.3 A distributor becoming a competitor through liberalisation........................................................................192 4.3 Other cooperations for the commercialisation of energy...........193 Production of energy.......................................................................................195 5.1 Competition issues of production cooperations...........................196 5.2 Safe harbour for production cooperations.....................................201 Production and sale of energy.......................................................................205 6.1 The Corrib case.....................................................................................207 6.2 The DUC case.......................................................................................208 Construction, ownership and exploitation of energy .............................210 infrastructure....................................................................................................210 7.1 Merger or antitrust law?.....................................................................212 7.2 Hardcore restrictions..........................................................................212 7.3 Analysis of likely effects of infrastructure cooperations..............213 7.3.1 Cooperations granting third party access to infrastructure......................................................................214 7.3.2 Special competition issues of cooperations granting third party access...............................................217 7.3.3 Captive use of infrastructure...........................................218

CHAPTER 3 1. 2.

Vertical agreements..................................................221

Introduction......................................................................................................221 Exclusive energy purchasing and supply arrangements............................224 2.1 Non-compete obligation imposed on energy buyers...................226 2.1.1 Competition issues of non-compete obligations in energy supply and distribution contracts.................228 2.1.2 Safe harbour: the Vertical block exemption Regulation...........................................................................233 2.1.3 Analysis in individual cases..............................................237 2.1.4 Efficiency defence – Article 101(3) EC........................241 2.2 Individual cases dealt with by the Commission............................249 2.2.1 Distrigas...............................................................................250 2.2.2 Repsol...................................................................................253 ix

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3.

4.

2.2.3 Gas Natural-Endesa...........................................................254 2.2.4 Electrabel/Mixed intercommunal electricity distribution companies.....................................................255 Partitioning of energy markets by territory or by customer....................256 3.1 Direct market partitioning by territory...........................................257 3.1.1 The Commission proceedings against destination clauses...................................................................................257 3.1.2 The GDF/ENI/ENEL cases and Gazprom case.........260 3.2 Indirect market partitioning by territory........................................261 3.3 Customer and use restrictions...........................................................265 Exclusive energy distribution agreements...................................................266 4.1 Competition issues of exclusive energy distribution agreements.............................................................................................269 4.2 Safe harbour: Vertical block exemption Regulation.....................274 4.3 Analysis outside the safe harbour.....................................................275 4.4 Efficiency defences – Art. 101(3) TFEU........................................277 4.5 Capacity reservation agreements......................................................280

CHAPTER 4 1. 2.

3.

Article 102 TFEU – Abuse of a dominant position...283

Introduction . ...................................................................................................283 Structure and context of Article 102 TFEU..............................................288 2.1 Rule and example.................................................................................288 2.2 Public measures and conduct by firms.............................................289 2.3 Structural control and conduct control..........................................290 2.4 Conduct control and the merger test..............................................290 2.5 Differences between Articles 101 and 102 TFEU.......................290 2.6 Union law and national law: geographic impact...........................291 2.7 Union law and national law: effect on trade..................................292 2.8 Union law and national law: substantive differences...................293 2.9 Competition law and sector specific law........................................293 The existence of a dominant position..........................................................295 3.1 Concept.................................................................................................295 3.1.1 Dominance, a special responsibility...............................295 3.1.2 Dominant position and relevant market......................296 3.2 Horizontal dominance........................................................................296 3.3 Vertical dominance..............................................................................297 3.3.1 Essential facilities...............................................................297 3.3.1.1 Essential facilities: infrastructure..................300 3.3.1.2 Essential facilities: information.....................300 x

Table of contents

4.

5.

3.3.1.3 The Bronner case..............................................301 3.3.2 Essential facilities in the energy sector..........................302 3.4 Individual and collective dominance...............................................303 3.4.1 Collective dominance: groups of undertakings..........304 3.4.2 Collective dominance: economic and legal links........304 3.4.3 Collective dominance and the significant impediment to effective competition test.....................305 3.5 Indicators of dominance.....................................................................307 3.5.1 Market share........................................................................308 3.5.2 Size and importance of competitors..............................309 3.5.3 Stability of market share and price wars........................309 3.6 Temporary dominance........................................................................309 3.7 Potential competition and barriers to entry...................................310 3.8 Barriers to entry....................................................................................311 3.9 Goodwill, trade marks and vertical integration.............................311 Abuse..................................................................................................................313 4.1 Concept.................................................................................................313 4.2 Abuse on connected markets.............................................................314 4.3 Abuse and collective dominance......................................................315 Types of abuses.................................................................................................316 5.1 The Sector Inquiry...............................................................................317 5.2 Exclusive dealing..................................................................................320 5.2.1 Customer foreclosure........................................................320 5.2.1.1 The Gas Natural case......................................321 5.2.1.2 The E.ON-Ruhrgas case..................................322 5.2.1.3 The Distrigaz settlement................................322 5.2.1.4 The EDF settlement........................................323 5.2.2 Input foreclosure................................................................325 5.2.3 Network foreclosure agreements....................................327 5.2.3.1 The UK-French Interconnector....................327 5.2.3.2 The GDF and E.ON cases..............................328 5.2.3.3 The CEZ case....................................................328 5.3 Tying.......................................................................................................329 5.3.1 Tying and market power...................................................330 5.3.2 Contractual and economic tying....................................330 5.3.3 De facto tying......................................................................331 5.3.4 Tying scenarios in the energy sector...............................332 5.4 Refusal to supply..................................................................................333 5.4.1 General considerations.....................................................333 5.4.2 Refusal to supply and tying..............................................334 xi

Table of contents

5.4.3 5.4.4

5.5

5.6

5.7

Refusal to license................................................................334 Refusals to supply and essential facilities......................336 5.4.4.1 The principle.....................................................336 5.4.4.2 The sector inquiry report...............................337 5.4.4.3 The Marathon commitments.........................339 5.4.4.4 The TTPC case . ..............................................340 5.4.4.5 The E.ON case..................................................341 5.4.4.6 The RWE case...................................................341 5.4.4.7 The ENI case.....................................................342 5.4.4.8 The BEH Electricity case................................342 5.4.4.9 The BEH Gas and Romanian gas interconnector cases..........................................343 5.4.4.10 Upstream gas supplies in Central and Eastern Europe.................................................344 Discrimination.....................................................................................345 5.5.1 Discrimination and competition on downstream markets.................................................................................345 5.5.2 Discrimination without competition on downstream markets.........................................................347 5.5.3 Discrimination and price retaliation.............................348 5.5.4 Discrimination according to nationality: the Svenska Kraftnet, OPCOM and DE/DK interconnector cases............................................................350 Exclusionary pricing practices...........................................................352 5.6.1 Predatory pricing...............................................................353 5.6.1.1 The AKZO case................................................353 5.6.1.2 After AKZO.....................................................354 5.6.1.3 Predatory prices and cross subsidies.............356 5.6.2 Exclusionary pricing practices and the energy sector.357 5.6.3 The price squeeze...............................................................358 5.6.4 Loyalty rebates....................................................................360 5.6.5 Target rebates......................................................................361 5.6.6 Quantitative rebates..........................................................362 Unfair prices..........................................................................................364 5.7.1 The test.................................................................................364 5.7.1.1 Introductory observations.............................364 5.7.1.2 Excessive and unfair prices . ..........................365 5.7.1.3 A difficult test to apply...................................367 5.7.2 Unfair pricing in the energy sector................................369 5.7.2.1 The sector inquiry............................................369 xii

Table of contents

6.

5.7.2.2 National networks...........................................370 5.7.2.3 The Spanish temporary congestion case.....371 5.7.2.4 The Elsam case..................................................371 5.7.2.5 Upstream gas supplies in Central and Eastern Europe.................................................372 5.7.3 Capacity withdrawals: the E.ON wholesale market case..........................................................................373 Conclusion........................................................................................................374

CHAPTER 5 1. 2.

Procedure.................................................................377

Introduction......................................................................................................377 The procedure before the Commission.......................................................378 2.1 Origin of cases......................................................................................379 2.1.1 Complaints..........................................................................379 2.1.2 Own-initiative proceedings.............................................383 2.1.3 Investigations into sectors of the economy and into types of agreements...........................................................383 2.1.4 No notification system/possibility of informal guidance...............................................................................384 2.2 Initial assessment . ...............................................................................386 2.2.1 Requests for information.................................................387 2.2.2 Inspections..........................................................................392 2.2.3 Power to take statements..................................................398 2.2.4 Meetings and other contacts with the parties and third parties.........................................................................399 2.3 Infringement proceedings..................................................................400 2.3.1 The opening of formal proceedings...............................400 2.3.2 The statement of objections.............................................402 2.3.3 Access to the Commission’s file......................................405 2.3.4 The reply to the statement of objections.......................413 2.3.5 Oral hearings......................................................................413 2.3.6 Consultation of the advisory committee......................414 2.4 Procedural safeguards.........................................................................415 2.5 Commission decisions........................................................................417 2.5.1 Common requirements....................................................417 2.5.2 Finding of inapplicability.................................................419 2.5.3 Interim measures................................................................420 2.5.4 Commitments decisions...................................................421 2.5.5 Finding and termination of infringement....................427 xiii

Table of contents

2.6 Part 4

2.5.6 Decisions imposing fines .................................................428 Judicial review.......................................................................................445 Merger control...................................................................451

CHAPTER 1

Introduction.............................................................451

CHAPTER 2

Jurisdiction: When does a merger fall under the merger Regulation?.............................................457

1.

2. 3.

4.

Concept of a concentration...........................................................................457 1.1 Introduction..........................................................................................457 1.2 Control..................................................................................................458 1.3 Full-function joint ventures...............................................................468 1.4 Non-controlling minority shareholdings.......................................475 Turnover thresholds .......................................................................................476 2.1 Notification thresholds.......................................................................476 2.2 Turnover calculation...........................................................................477 Referrals.............................................................................................................481 3.1 Introduction..........................................................................................481 3.2 Referral from the Commission to the Member States.................481 3.3 Referral from the Member States to the Commission.................485 Legitimate interests..........................................................................................487

CHAPTER 3 1. 2. 3. 4. 5. 6. 7. 8.

Substantive assessment of concentrations..................493

Introduction......................................................................................................493 The relevant market.........................................................................................493 The substantive test..........................................................................................494 Efficiencies.........................................................................................................496 Remedies............................................................................................................497 Acquisition of a failing company..................................................................499 Ancillary restraints...........................................................................................500 Judicial Review.................................................................................................503

xiv

Table of contents

CHAPTER 4 1. 2. 3.

4.

Merger control in the electricity and gas sectors........505

Introduction......................................................................................................505 Categories of mergers and acquisitions common to the energy sector...................................................................................................................509 Factors relevant to the assessment of market power in the gas and electricity sectors..............................................................................................510 3.1 Relevant factors....................................................................................510 3.1.1 Market share........................................................................510 3.1.2 The size and importance of competitors.......................512 3.1.3 Closeness of competition between merging parties ..513 3.1.4 Commercial advantages of the company in question.514 3.1.4.1 Vertical integration: ownership of transmission and distribution facilities.......515 3.1.4.2 Economies of scale, balancing.......................516 3.1.4.3 Advantageous generation portfolio.............516 3.1.4.4 Horizontal integration....................................517 3.1.4.5 Existence of long-term retail/industrial supply contracts................................................517 3.1.4.6 Supplier of last resort/regulated tariff supplier...............................................................517 3.1.5 Entry barriers......................................................................517 3.1.5.1 Regulatory barriers..........................................518 3.1.5.2 Interconnection capacity................................518 3.1.5.3 Customer loyalty..............................................518 3.1.5.4 Maturity of the market...................................518 3.1.5.5 Stranded costs . ................................................519 3.1.5.6 Availability of wholesale capacity.................519 3.1.6 Relevant evidence..............................................................519 3.1.6.1 Changes in market share................................519 3.1.6.2 Market surveys..................................................520 3.1.6.3 Price levels.........................................................520 3.1.7 The Energy Sector Inquiry and merger review ever since: a more sophisticated approach to defining market power......................................................521 Horizontal mergers..........................................................................................526 4.1 Horizontal mergers within the same relevant geographic market.....................................................................................................526 4.2 Horizontal mergers between companies active on neighbouring geographic markets....................................................532 xv

Table of contents

5. 6.

7. 8.

Vertical mergers................................................................................................548 Conglomerate mergers between electricity and gas companies.............559 6.1 Introduction..........................................................................................559 6.2 Merger between a dominant and a non-dominant undertaking, or between two non-dominant firms......................560 6.3 Merger between a dominant gas and a dominant electricity . ...564 company.................................................................................................564 6.4 Cases dealt with by the Commission...............................................564 6.4.1 EDP/GDP..........................................................................565 6.4.2 DONG/Elsam/Energy E2..............................................570 6.5 Cases dealt with by national competition authorities..................574 6.6 Conclusions..........................................................................................575 Coordinated effects and oligopolistic dominance....................................576 Conclusion........................................................................................................583

CHAPTER 5 1. 2.

3. 4. 5.

6. 7. 8.

Introduction......................................................................................................585 Divestiture of shareholdings..........................................................................587 2.1 Divestiture and severance of structural links.................................587 2.2 Accompanying commitments to divestiture..................................600 2.3 Up-front buyer.....................................................................................602 Other remedies in relation to shareholdings..............................................602 Access to generation capacities......................................................................606 Access to infrastructure / divestiture of infrastructure............................613 5.1 Access to transmission and storage infrastructure........................613 5.2 Improvement of the functioning of the infrastructures...............614 5.3 Release of capacity at interconnectors.............................................616 5.4 Increase of interconnector capacity.................................................617 5.5 Divestiture of infrastructure..............................................................618 Remedies related to contracts........................................................................620 Remedies related to tariffs and prices..........................................................623 Insufficient remedies........................................................................................625

CHAPTER 6 1. 2.

Remedies in energy mergers.....................................585

Merger procedure.....................................................631

Pre-notification contacts................................................................................631 Notification ......................................................................................................633 2.1 Mandatory notification......................................................................633 2.2 Suspension effect..................................................................................634 xvi

Table of contents

3. 4. 5. 6. 7.

8.

2.3 Content of the notification................................................................639 2.4 Language................................................................................................639 Simplified procedure.......................................................................................640 Standard procedure.........................................................................................642 4.1 Phase I....................................................................................................642 4.2 Phase II...................................................................................................643 Third party involvement in the proceedings..............................................649 Business secrets.................................................................................................650 Sanctions for violation of procedural obligations.....................................652 7.1 Failure to notify....................................................................................652 7.2 Implementation of a concentration.................................................653 7.3 Failure to implement a remedy.........................................................653 7.4 Supply of incorrect or misleading information.............................654 Judicial review . ................................................................................................654 8.1 Decisions open to appeal ..................................................................655 8.2 Standing to appeal ..............................................................................657 8.3 Scope of judicial review......................................................................662 8.4 Consequences of the annulment of a merger decision ...............664

Part 5

State aid.............................................................................665

CHAPTER 1

Introduction.............................................................665

CHAPTER 2

Coal and Nuclear Aid

Section I: Coal: the ECSC Treaty...........................................................................669 1. Introduction......................................................................................................669 2. EC Council Regulation 1407/02 and the Coal Decision 2010............671 2.1 Substantive provisions........................................................................672 2.2 Procedural provisions..........................................................................672 3. Individual decisions under Regulation 1407/02.......................................673 3.1 New Member States............................................................................675 Section II: Nuclear: the Euratom Treaty................................................................682 1. Introduction......................................................................................................682 2. Commission decisions....................................................................................684 2.1 Decisions pre-Lisbon..........................................................................686 3. Hinkley Point C...............................................................................................689 xvii

Table of contents

4. 5.

3.1 The General Court judgment............................................................691 Recent Commission Decisions ....................................................................696 Transparency.....................................................................................................705

CHAPTER 3 1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

11.

State aid in the TFEU...............................................707

Introduction......................................................................................................707 The beneficiary.................................................................................................708 State resources . ................................................................................................709 3.1 State resources and tradeable certificates........................................714 Imputability......................................................................................................715 4.1 Imputability and Taxation on Energy Products............................718 4.2 Imputability and Power Purchase Agreements (PPAs)...............719 The concept of advantage...............................................................................720 5.1 Disposal of public land or assets at less than full market value..726 5.2 State participation and the market economy investor test..........727 5.2.1 Introduction........................................................................727 5.2.2 The private investor test or the ‘MEIT’ and investments by State Undertakings................................729 5.2.3 The market investor test and the PPAs..........................730 5.2.4 The EDF rulings.................................................................732 Selectivity...........................................................................................................734 6.1 Selectivity issues and the EC Directive 2003/87..........................739 Effect on trade..................................................................................................741 The de minimis Regulation............................................................................742 Conclusion........................................................................................................743 Forms of state aid.............................................................................................744 10.1 Introduction..........................................................................................744 10.2 The Communication on state guarantees.......................................744 10.2.1 Background.........................................................................744 10.2.2 The Commission’s 2008 Notice on State Guarantees...........................................................................745 10.2.3 Benchmarks.........................................................................746 10.3 Infrastructure aid.................................................................................750 10.4 Aid granted through energy sector companies..............................750 10.4.1 Introduction........................................................................750 10.4.2 Cross-subsidisation............................................................752 The Relationship between Article 107(1) TFEU ....................................753 with other Treaty Articles..............................................................................753 11.1 Introduction..........................................................................................753 xviii

Table of contents

11.2 The free movement principles...........................................................754 11.3 Para-fiscal charges and indirect taxation.........................................755 11.4 The Competition rules.......................................................................762 11.4.1 Articles 101 and 102 TFEU............................................762 11.4.2 The Merger Regulation.....................................................763 11.4.3 Conclusion..........................................................................764 CHAPTER 4 1.

2.

3.

4.

The application of EU state aid lawto the energy sector.......................................................................765

Introduction......................................................................................................765 1.1 The automatic exceptions – Article 107(2) TFEU......................765 1.2 The discretionary exceptions – Article 107(3) TFEU.................766 1.3 The exemption regulations.................................................................768 The individual exemptions.............................................................................772 2.1 Article 107(3)(a): Regional aid........................................................772 2.2 The Financial Crisis – the Temporary Frameworks......................774 2.3 Article 107(3)(b) TFEU: Projects of common interest..............775 2.4 Article 107(3)(c) TFEU: Development of economic activities or areas..................................................................................779 2.5 The Regional Aid Guidelines ...........................................................780 2.6 The Regional Aid Guidelines for 2014-2020................................783 2.7 Research and Development and Innovation Framework............784 Guidelines with relevance to the energy sector.........................................786 3.1 Rescue and restructuring aid.............................................................787 3.1.1 Introduction........................................................................787 3.1.2 Rescue aid............................................................................789 3.1.3 Restructuring aid...............................................................790 The methodology on stranded costs............................................................796 4.1 Introduction..........................................................................................796 4.2 The criteria for stranded cost exemption........................................798 4.3 The individual decisions.....................................................................799 4.3.1 Austria..................................................................................799 4.3.2 Belgium................................................................................800 4.3.3 Greece..................................................................................801 4.3.4 Hungary...............................................................................801 4.3.5 Ireland..................................................................................801 4.3.6 Italy.......................................................................................802 4.3.7 Luxembourg........................................................................802 4.3.8 The Netherlands.................................................................803 xix

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5.

6.

4.3.9 Poland..................................................................................803 4.3.10 Portugal . .............................................................................804 4.3.11 Slovenia................................................................................804 4.3.12 Spain.....................................................................................805 4.3.13 United Kingdom................................................................806 Public service obligations...............................................................................806 5.1 Introduction..........................................................................................806 5.2 The SGEI frameworks and decisions...............................................810 5.3 The energy sector and Article 106(2) TFEU.................................813 5.4 The Commission’s guidance notes on Directives 2003/54 and 2003/55.........................................................................................815 The Clean Energy Package.............................................................................816

CHAPTER 5 1. 2.

State aid for environmental protection......................819

Introduction......................................................................................................819 The 2014 Guidelines on State aid for environmental protection and energy.........................................................................................................821 2.1 Introduction..........................................................................................821 2.1.1 Legal basis and common assessment principles...........822 2.1.2 The General Compatibility provisions..........................823 2.2 Key features in the 2014 Guidelines................................................824 2.2.1 Changes in the mechanisms for renewable energy support.................................................................................825 2.2.2 Aid for generation adequacy...........................................825 2.2.3 Competitiveness of European Industry and the exemption from funding of RES....................................827 2.2.4 Cross-border energy infrastructure................................828 2.2.5 Individual aid measures covered by the 2014 Guidelines...........................................................................828 2.2.6 (a) Objective of common interest..................................829 2.2.7 (b) Need for State intervention......................................829 2.2.8 (c) appropriateness of the aid measure (Section 3.2.3);...................................................................830 2.2.9 (d) incentive effect (Section 3.2.4);...............................830 2.2.10 (e) proportionality of the aid (aid kept to the minimum) (Section 3.2.5);.......................................832 2.2.11 (f ) avoidance of undue negative effects on competition and trade between Member States (Section 3.2.6);...................................................................832 xx

Table of contents

3.

2.2.12 (g) transparency of aid (Section 3.2.7).........................833 2.3 Measures previously covered by the 2008 Guidelines..................834 2.3.1 Aid for efficiency measures, including cogeneration and district heating and cooling.....................................834 2.3.2 Aid for resource efficiency and in particular for waste management.............................................................837 2.3.3 Aid for environmental studies.........................................838 2.3.4 Aid for early adaptation/ going beyond Union standards or for higher environmental protection in the absence of Union standards (including aid for the acquisition of new transport vehicles).............838 2.3.5 Aid for the remediation of contaminated sites............839 2.3.6 Aid for the relocation of undertakings..........................840 2.3.7 Aid involved in tradable permit schemes......................842 2.3.8 Aid for carbon capture and storage................................843 2.4 New Measures under the 2014 Guidelines.....................................844 2.4.1 Capacity mechanisms.......................................................847 2.4.2 Tax reductions or exemptions and in particular exemptions from RES funding........................................850 2.4.3 Exemption from network charges for large electricity consumers.........................................................856 2.4.4 Aid for energy infrastructure...........................................857 Concluding remarks........................................................................................859

CHAPTER 6 1. 2. 3. 4.

State aid procedure...................................................861

Introduction......................................................................................................861 The Treaty regime............................................................................................861 New aid..............................................................................................................862 Existing aid........................................................................................................864 4.1 Existing or New Aid and Preferential Tariffs.................................867 4.2 Existing aid in the new Member States...........................................868 4.3 Existing versus New Aid in the Hungarian and Polish PPA cases.........................................................................................................869 4.4 New aid..................................................................................................872 4.4.1 Formal notification is often preceded by an informal pre-notification procedure. .............................................872 4.4.1.1 Pre-Notification...............................................872 4.4.1.2 The preliminary investigation.......................872 4.4.2 The formal or contentious phase....................................877 xxi

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4.5

4.6

5.

4.4.3 Information requirements................................................878 4.4.4 Procedures in relation to existing aid schemes.............882 Recovery of unlawful aid................................................................................883 4.5.1 Introduction........................................................................883 4.5.2 Recovery in the Hungary PPA case................................885 4.5.3 Contractual termination..................................................886 4.5.4 International Law aspects.................................................887 4.5.5 Legitimate expectations....................................................890 4.5.6 Recovery from a subsequent owner...............................891 4.5.7 The ‘Deggendorf ’ Principle.............................................894 4.5.8 Para-fiscal charges and recovery......................................894 Judicial review...................................................................................................896 4.6.1 Introduction........................................................................896 4.6.2 Locus Standi........................................................................897 4.6.3 The “Plaumann” Test . .....................................................897 4.6.4 Trade associations and NGOs.........................................899 4.6.5 The role of the national courts........................................901 4.6.6 Energy cases........................................................................902 Ex Post Monitoring.........................................................................................904 5.1 Evaluation Plans...................................................................................904 5.2 Monitoring of Aid Schemes..............................................................905

Part 6 Chapter 1 1. 2. 3.

Article 106 TFEU..............................................................907 Special and exclusive rights.......................................907

Introduction......................................................................................................907 The Treaty Article............................................................................................908 Article 106(1) TFEU......................................................................................908 3.1 Introduction..........................................................................................908 3.2 Public undertakings.............................................................................909 3.3 Special and exclusive rights................................................................911 3.4 The scope of Article 106(1) TFEU..................................................912 3.4.1 Article 106(1) TFEU and Treaty rules on the four freedoms..............................................................................913 3.4.2 Article 106 (1) and Article 102 EC...............................915 3.4.2.1 Accumulation of rights...................................915 3.4.2.2 Manifest failure to satisfy demand...............916 xxii

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4.

5. 6.

7.

3.4.2.3 The Corbeau-type cases..................................917 Article 106(2) TFEU......................................................................................918 4.1 Introduction..........................................................................................918 4.2 Article 14 TFEU and the Protocol 26 on SGIs.............................919 4.3 What are services of general economic interest?...........................920 4.4 The requirements of Article 106(2) TFEU....................................921 4.4.1 Specific task or mission.....................................................921 4.4.2 Task entrusted by a public measure................................922 4.4.3 The Necessity and Proportionality Tests......................923 4.4.4 The Union interest.............................................................924 Article 106(3) TFEU......................................................................................925 Services of general economic interest in the energy sector.....................927 6.1 Introduction..........................................................................................927 6.2 The “electricity cases” of 1997...........................................................928 6.3 Article 106(2) and the IEM Directives...........................................933 6.4 Federutility, v Autorità per l’energia elettrica e il gas (C-265/08)...........................................................................................935 6.5 Financing public service obligations and Article 106(2) TFEU.....................................................................................................937 6.6 Trends in Commission Practice before and after Altmark..........941 Conclusion........................................................................................................945

Appendices Appendix 1

TFEU Articles..........................................................................947

Appendix 2

Implementation of the rules on competition.....................955

Appendix 3

Horizontal cooperation agreements................................. 1001

Appendix 4

Guidelines on Vertical Restraints...................................... 1125

Appendix 5

Control of concentration between undertakings.......... 1219

Appendix 6

Guidelines on State Aid....................................................... 1269

Appendix 7

Application of Article 108 of the Treaty.......................... 1365

Index ........................................................................................................................... 1403 xxiii

Part 1 Introduction

Part 1 Introduction

Competition policy has always played a central role in the EU’s efforts to change its electricity and gas markets from a series of national electricity and gas markets dominated by a single, usually state-owned, incumbent, into a single European market, characterised by liquid competitive markets with customers enjoying a wide choice of suppliers. It continues to play this role as markets continue to integrate further, regulated by increasingly detailed mechanisms to deepen liquidity and competition. It has equally played a major role in the EU’s attempts to decarbonise its economy. In 2007 the EU’s Heads of State and Government agreed the target of reducing carbon emissions by 20% by 2020. In 2008, they agreed the objective of 20% of renewable energy in the EU’s energy mix by 2020, and a 20% improvement in energy efficiency by the same date. The EU has now set the objective of ensuring that, by 2030, the EU has 32% of its overall energy use from renewable sources, greenhouse gas emissions are cut by at least 40% (from 1990 levels), and there is an improvement on energy efficiency of at least 32.5%. Achieving these targets will continue to require very considerable amounts of state aid, as will meeting the longer term objective of a (quasi or completely) decarbonised EU energy system by 2050 In the early years of energy liberalisation, competition policy focused on the one hand on ensuring that third-party access to networks was non-discriminatory and that incumbents were prevented from abusing their dominant market position to deter market entry by potential competitors; and on the other hand it focused on guaranteeing that mergers and acquisitions were used to promote market entry and competition rather than to reinforce existing dominance and create new entry barriers. In renewable energy and energy efficiency the Commission (following a number of seminal Court judgments) intervened rather lightly, allowing Member States a great deal of freedom in choosing the support schemes they wished to implement, focusing on preventing over-compensation, 1

Part 1 Introduction

as well as enabling them to restrict any support to operators within their own borders – an exception to the normal free movement rules. A major shift in enforcement can be detected in recent years, as reflected in the fourth and fifth editions of this book. Since the entry into force of the 2009 Third Internal Energy Market package, and the much stronger rules on transmission system unbundling that this requires, the need for enforcement of non-discriminatory access to networks, customers and balancing by transmission companies has greatly reduced, as the incentives to discriminate have in many cases greatly evaporated due to the resultant structural changes in ownership and operation. Equally, a great deal of the restructuring and merger activity in these sectors has reached a level of maturity as all the major EU gas and electricity groups have now a multi-country presence, leading to far less activity in the merger field. However, this does not mean that the role of competition policy has diminished; far from it. In terms of state aid, the EU as a whole, and the Commission in particular, has been addressing the fact that renewable electricity production is becoming increasingly competitive with ‘traditional’ forms of generation, and the need for subsidies is rapidly falling. This led to new State Aid Guidelines in 2014 that started a process of limiting options for Member States in terms of renewable energy support schemes, focusing on encouraging increased competition between suppliers and driving down prices. As the EU seeks to meet its new target of 32% renewable energy in its energy mix by 2030, this is an area of law that will grow in importance. Equally, as the market share for renewable electricity has increased rapidly and has a zero or very low marginal cost, this has had significant effects on spot prices. Member States have become concerned that the price incentives for companies to invest in other forms of electricity generation that they consider to be essential on the grounds of energy security, such as nuclear, are inadequate, leading to state aid whereby Member States guarantee minimum prices for new investors. In addition, as wind and PV are intermittent forms of energy, Member States have become concerned about ensuring that adequate reserve capacity exists. In 2016, the Commission finalised its sector inquiry on capacity mechanisms, showing that transparent, balanced, market-oriented enforcement of State Aid rules will be key in this area, and in pursuing the transition to a decarbonised 2

Part 1 Introduction

energy model more generally. Specific capacity mechanisms have been approved by the Commission in several Member States in recent years. Further, the 2018 judgment of the EU General Court in the Tempus Energy case showed the need for detailed scrutiny of capacity mechanisms, and any other state aid measures, by the Commission. In the anti-trust area, the Commission continues to be determined to ensure that consumers in all Member States enjoy the benefits of an integrated and energy market. The Gazprom case was brought to an end in 2018 with the acceptance of commitments aimed to address the Commission’s main concerns, including market segmentation, excessive pricing and potential competitive distortions in the development of gas infrastructure. Other cases have also been concluded since this book was last edited, such as the Commission’s investigation into access to key natural gas infrastructure in Bulgaria, leading to fines imposed on the incumbent gas operator. In addition, the Commission has now launched an investigation into restrictions to the free flow of LNG sold by Qatar Petroleum in Europe. As regards mergers, the Commission has recently had the chance to look into some significant cases, especially in electricity markets. The acquisition of ­Uniper by Fortum, two important electricity suppliers in the Nordic region was cleared unconditionally in 2018, not least because of the high level of interconnectivity between different countries in the Nordic region, and the amount of spare generation. This case is yet another example of European energy markets heading towards regional consolidation, and regional market definition. The Commission however scrutinized the potential for market abuse in the wholesale electricity very carefully, following the principles used in other cases in the past. An in-depth review of E.ON’s proposed acquisition of RWE’s Innogy was ongoing when this edition went to print. All of these developments, and many more covered in this Fifth edition, reflect the fact that the EU’s Internal Energy Market and decarbonisation agenda are maturing rapidly becoming more complex and requiring increasingly intricate layers of regulation. There is little doubt that competition policy is, and will remain, at the forefront of the EU’s Energy Union.

3

Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

Part 2 The definition of the relevant market

CHAPTER 1 Introduction Identification of the market(s) in which a given transaction or behaviour may have effects – the relevant market(s) – is a necessary precondition for the assessment of any concentration or anticompetitive behaviour.1 The main purpose of this exercise is to identify the competitive constraints that the undertakings involved face, by assessing the market power of the companies concerned and of their competitors.

2.1

Under European Community competition law:2

2.2

“a relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the prod‑ ucts’ characteristics, their prices and their intended use”; and “the relevant geographic market comprises the area in which the undertakings con‑ cerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distin‑ guished from neighbouring areas because the conditions of competition are appreci‑ ably different in those area”.

1 2

See e.g. cases C-68/94 and C-30/95, France v Commission (Kali & Salz), [1998] ECR I-1375, paragraph 143. Section 6 of Form CO (Annex 1 of Commission Regulation No. 802/2004 of 7.04.2004 implementing Council Regulation No. 139/2004 of 20.01.2004 on the control of concentrations between undertakings); as well as the Notice on the definition of the relevant market, OJ C 372/5, 9.12.1997.

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Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

2.3

The Commission’s Notice on the definition of the relevant market lists the basic principles upon which the Commission relies in the process of defining a relevant market.3

2.4

Demand substitution is the main yardstick: an undertaking cannot be considered to be able to act independently from competitive constraints if its customers are in a position to switch easily to substitute products or to suppliers located elsewhere. The exercise of market definition therefore consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, in terms both of products or services and of geographic location of suppliers.

2.5

Starting from the products that the undertakings involved sell and the area in which they sell them, additional products and areas will be included in, or excluded from, the market definition, depending on whether competition from these other products and areas affect or restrain sufficiently the pricing of the parties’ products in the short term. The main economic test applied in this respect is “whether the parties’ customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas being considered”.4 Where the hypothetical price increase would be unprofitable because significant substitution would result in a loss of sales, the substitutes and areas concerned are included in the relevant market.

2.6

In practice, the process of defining relevant markets is undertaken as follows. On the basis of the information available, the Commission is usually in a position to broadly establish the various conceivable alternative market definitions within which a concentration or a restriction of competition has to be assessed. If it is then satisfied that the transaction or behaviour does not raise competition concerns under these alternative market definitions (i.e. if one includes in the market definition all plausible alternative products and competitors to those of the undertakings in question), it will not seek to arrive at a precise market definition, and will leave open the question of market definition. Only when doubts remain as to the existence of competition issues will the Commission seek to reach a definitive conclusion on the precise product and geographic markets. For example, as most mergers do not raise competition issues even on widely defined markets, it is rare that merger control decisions take an express view as to the precise market definition. 3 4

Commission notice on the definition of the relevant market OJ, C 372/5, 9.12.1997. Commission Notice on the definition of the relevant market, at paragraph 17. Available on www.europa. eu.int/comm/competition/mergers/legislation/mergmrkt.html

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Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

The main challenge faced by market definition in the gas and electricity sector is to take account of the recent and ongoing evolutions that are taking place in the wake of market opening under the EC Gas and Electricity Directives.5

2.7

As regards product market definition, liberalisation has fundamentally changed the structure and functioning of the industry, at production, transport, and supply levels. From a situation where the supply and transport of electricity and gas were in the hands of the same or few companies benefiting from network and distribution monopolies, EC rules have substituted market opening, unbundling of supply and transport and third party access. With independent companies being active in energy supply, and the process of market opening, a distinction between transport and supply activities, or eligible and non eligible customers6, has to be drawn. The development of energy trading also raises the issue of the distinction between supply and trading activities, and, within trading, between physical and financial trading, or between trading on a bilateral basis or on developing energy exchanges. Finally, completely new activities are emerging, such as balancing and network services, or grid management and operation. This developing economic and market reality arising from market opening should be reflected in market definitions.

2.8

The same challenge has to be faced at geographic level. Because transmission and distribution activities were until recently subject to national and local monopolies in Europe, the relevant geographic market for electricity and gas supply was logically no wider than national or even local in scope. As a result of market opening and third party access, it is now possible for foreign suppliers to enter national and local markets and supply eligible customers. A number of Community initiatives are also bringing about increasingly converging national regulatory frameworks.

2.9

Arguably, these changes will lead to the development of wider than national markets within the EU, and possibly, in the longer term, to a single EU market. However, for the Commission, the relevant geographic markets for the supply of gas and electricity remain at present largely national in scope within EU Member States, and the more recent decisions strongly suggest that this is not likely to change in the near future. In January 2007, the Commission’s Final Report on the Enquiry into the European Gas and Electricity Sectors unequivocally con-

2.10

5 6

See Volume I of EU Energy Law. An eligible customer is one that is free to choose its supplier. Under EC law, as from July 2007, all customers should be eligible. However, under the legal framework of some Member States, such as France, Spain and Portugal, there are regulated eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until they opt to join the free market.

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Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

cluded that “at the wholesale level, gas and electricity markets remain national in scope”.7 This question whether, or how quickly, national markets have evolved or will evolve into wider regional ones is a key issue for competition policy in the energy sector, as former national incumbents will almost always have dominant positions on nationally defined markets.

2.11

The Commission’s Notice on the definition of the relevant market makes clear that, especially in relation to merger control where the purpose of the competition analysis is essentially prospective,8 the Commission must take into account ongoing evolutions arising from EC market integration in “a situation where national markets have been artificially isolated from each other because of the existence of legislative barriers that have now been removed”.9 As a consequence, the Commission shall be cautious in situations where “companies (…) enjoy high market shares in their domestic markets just because of the weight of the past”.10 7

8

9

10

Communication from the Commission – Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report) {SEC(2006) 1724}, at paragraph 14. The Commission also stated that cross-border sales do not currently impose any significant competitive constraint. Incumbents rarely enter other national markets as competitors. Insufficient or unavailable cross-border capacity and different market designs hamper market integration (paragraph 21). As an exception, it should be noted that in GDF/Suez (Case M.4180 of November 2006), the Commission admitted that gas trading at the Zeebrugge Hub was part of the same market as the English NBP hub (see book paragraph 2.392). The report is available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html#final This is because what is at stake is the assessment of the – future – position of the undertaking resulting from the transaction in question. In contrast, the analysis of past behaviour under Articles 81 or 82 EC should focus on the factual situation relevant at the time of the agreement or conduct in question. See Notice on the definition of the relevant market. Paragraph 32 of the Commission’s Notice: “Finally, the Commission also takes into account the continuing process of market integration, in particular in the Community, when defining geographic markets, especially in the area of concentrations and structural joint ventures. The measures adopted and implemented in the internal market programme to remove barriers to trade and further integrate the Community markets cannot be ignored when assessing the effects on competition of a concentration or a structural joint venture. A situation where national markets have been artificially isolated from each other because of the existence of legislative barriers that have now been removed will generally lead to a cautious assessment of past evidence regarding prices, market shares or trade patterns. A process of market integration that would, in the short term, lead to wider geographic markets may therefore be taken into consideration when defining the geographic market for the purposes of assessing concentrations and joint ventures”. Paragraph 29 of the Commission’s Notice: “The reasons behind any particular configuration of prices and market shares need to be explored. Companies might enjoy high market shares in their domestic markets just because of the weight of the past (...). The initial working hypothesis will therefore be checked against an analysis of demand characteristics (importance of national or local preferences, current patterns of purchases of customers, product differentiation/brands, other) in order to establish whether companies in different areas do indeed constitute a real alternative source of supply for consumers. The theoretical experiment is again based on substitution arising from changes in relative prices, and the question to answer is again whether the customers of the parties would switch their orders to companies located elsewhere in the short term and at a negligible cost”. See also paragraph 50: “Barriers and switching costs associated to divert orders to companies located in other areas. The absence of trans-border purchases or trade flows, for instance, does not necessarily mean that the market is at most national in scope. Still, barriers isolating the national market have to be

8

Part 2 – The definition of the relevant market Chapter 1 – Introduction Lena Sandberg and Lyndy Davies

In attempting to clarify the Commission’s approach to market definition in the energy sector, significant indications can so far mostly be found in merger control decisions. For this reason, the vast majority of decisions referred to under this chapter are merger control decisions. However, subject to the time-related considerations of the analysis mentioned above, there is no reason to expect that trends and reasoning identified in merger decisions should not apply mutatis mutandis to anti-trust cases. Electricity and gas are two distinct product markets and will therefore be examined separately below.

identified before it is concluded that the relevant geographic market in such a case is national”.

9

2.12

2.13

Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

CHAPTER 2 The relevant product market – Electricity 1.

Introduction

The European Commission has, in its decision practice over the years, analysed the possible relevant markets in the electricity sector. Electricity is a relevant product market distinct from gas and other energy sources.11 It alone can be used for a number of purposes such as lighting. Furthermore, although for a limited number of applications, essentially the production of heat,12 there is a potential substitutability with other sources of energy used by households and industrial operators, this substitutability remains very limited because of the high equipment costs induced by switching from one source of energy to the other.

2.14

Within the electricity sector, on the basis that they require “ different assets and resources, and the market structures and conditions of competition are different for each”,13 the four following segments have traditionally been identified as constituting different product markets:14

2.15

11

12 13 14

See, recently in cases M.6984, pagraph 15, M.3448, paragraph 8 and M.3440, paragraph 14. The same statement was made in the early decisions M.568, paragraph 17 and, in relation to gas, M.493, paragraphs 21-24. In these later decisions, the Commission also mentioned the exclusive use of electricity to get some chemical reactions and for traction purpose, and referred to the fact that, as electricity is produced from another source of energy, it is necessarily more expensive, and is therefore only used when the characteristics of heat requires it. It was added that, from a supply-side point of view, each source of energy has different requirements for production, storage and transport, so that switching from electricity to other sources of energy also requires specific and important investments from the supply point of view. The Commission refers to water and space heating and cooking for households and limited industrial applications (case M.3448, paragraph 8). Case M.1659, paragraph 7. Also see case M.5978, paragraph 12. The distinction was first made in relation to the UK, in EDF/London Electricity, case M.1346, paragraph 12, and then in cases M.1659, paragraph 7; M.3210, paragraph 8; M.803, paragraph 9; M.3173, paragraph 8; M.3007, paragraph 10; M.2801, paragraph 8; M.2679, paragraph 8; M.1673, paragraph 11; M.1606, paragraph 10; JV.36, paragraph 25; M.2209, paragraph 10; M.2890, paragraph 17; M.1557, paragraph

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Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

(i)

generation and wholesale, the production of electricity in power stations;

(ii)

transmission, the transport of electricity over high tension networks;

(iii) distribution, the transport of electricity over the low tension network; and (iv) retail supply, the sale of electricity to the final consumer.

2.16

Also traditionally, although only in more recent decisions, and not systematically, an electricity trading market has been identified, generally defined as the purchase and resale of electricity which is not necessarily directed to final consumers15. The more recent decisions also refer to a market for ancillary services16.

2.17

As often stated at the beginning of the market analysis: “the definition of the relevant product market(s) in the electricity sector must take into account the existing degree of market opening thereof ”.17 In recent cases, the Commission has therefore undertaken an in-depth analysis of the state of liberalisation in the country or countries concerned. It is therefore likely that market definitions will continue to evolve to fit with the reality of liberalised markets. It should be noted in this regard that, under the Directive, as from July 2007 all customers should be eligible.

2.18

Another important feature of the Commission’s decision-making practice is that market definitions are largely influenced by the specific characteristics of the national market in question, and the competition issues raised by the transaction or anticompetitive practices or behaviour, so that market definitions vary from one country to another.

15 16 17

22; M.3448, paragraph 9; M.3210, paragraph 8; M.3318, paragraph 12; M.3075 M.3080, paragraph 11; M.1949, paragraphs 10-12; M.3696, paragraph 209; M. 3868, paragraph 228; M.5911, paragraph 21; M.5978, paragraph 12; M.5979, paragraph 7; M.6540, paragraph 16; M.6984, paragraphs 15-17. The distinction between transport, generation, distribution (as both supply and local transport) and trade was however already made in the early decision M.493, paragraph 29. The market was first formally identified in EDF/Louis Dreyfus in case M.1557, paragraph 22, and then in cases JV.36, paragraph 25; M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; M.3306, paragraph 8; M.5911, paragraph 21; and M.5979, paragraph 11. Cases M.5911, paragraph 21; M.5512, paragraph 14. Also see the earlier decisions in cases M.4180, M.3440 and M.5224. Case M.3448, paragraph 9.

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Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

2.

The supply of electricity

The Commission has traditionally made a general distinction, within the supply of electricity, between generation and wholesale on the one hand and supply to final customers on the other hand.

2.19

2.1 Wholesale supply markets 2.1.1 Introduction The main issues addressed by the Commission in relation to the wholesale supply market concern the precise scope of the market and possible subdivisions within this market.

2.20

An essential issue for market definition in a liberalised electricity sector is the distinction between electricity trading and wholesale supply. So as to comply with the traditional distinction made by the Commission between trade and supply, this is addressed in the section on trade below.18

2.21

2.1.2 Definition and scope of the wholesale market 2.1.2.1 Generation and wholesale In most decisions, the Commission identifies a generation and wholesale market, or simply a wholesale market, as a distinct market.19 “Generation and wholesale” is traditionally defined as covering the production of electricity at power stations as well as electricity physically imported through interconnectors20 and its sale on the wholesale market to traders, distributors or large industrial 18 19

20

See book paragraphs 2.62-2.80. See e.g. cases M.2209, paragraph 10; M.2679, paragraph 9; M.2801, paragraph 12; M.2890, paragraph 14; M.3007, paragraph 11; M.3075-3080, paragraph 11; ; M.3210, paragraph 8; M.3268, paragraphs 14 and 19; M.3318, paragraph 12; M.3440, paragraph 31; M.4180, paragraph 674; M.5519, para 15 and 16; M.5978, paragraph 18; M.5979, paragraph 15; and M.7131, paragraph 29. An express distinction between generation and wholesale was never made. In a recent case, the parties submitted that generation and wholesale should be part of separate markets as electricity production may be regarded as the first part of the value chain and the production of electricity is required to take place in a separate legal entity from the delivery of electricity to end-users. The Commission left open the precise market definition (case M.3268, paragraph 15). In its Verbund/Energie Allianz ( June 2003) decision, the Commission gave an example of a situation in which the distinction may have an impact on market shares calculation: “in the generation of electricity there is no overlapping between the parties’ activities on the market, because each party’s power generation branch supplies the power it generates only inside the organisation, so that power is available to the market not at the generation stage but only at the downstream commercial stage” (case M.2947, paragraph 27).

13

2.22

Part 2 – The definition of the relevant market Chapter 2 – The relevant product market – Electricity Lena Sandberg and Lyndy Davies

2.23

2.24

end-users.21 The Commission recently confirmed that generation and wholesale should be seen as a single product market.22 In a slightly different form, in relation to the German supply market, earlier Commission decisional practice identified a separate market for the supply of electricity at transmission level (high voltage lines).23

2.1.2.2 Supply to large end customers In substance, the above definitions of the wholesale market cover electricity supply to traders and distribution companies or retailers. There is however some uncertainty as to the inclusion of very large end customers, directly supplied at transmission level, as part of the wholesale market. Under the traditional market definition, the Commission separates the generation and wholesale market from the market for supply to end users, large end customers in principle being part of the latter market. This is the case, for example, in the Commission’s decisions concerning the English and Welsh market and, more recently, for the German market.24. On the other hand, this distinction is generally not applied by the Commission in “Phase II” cases raising significant competition issues, nor has it been applied in certain recent Phase I decisions.25 Following a different approach in such cases, the Commission makes a distinction between wholesale and retail markets, the latter being defined as the market for electricity offered subsequently by retailers to eligible customers. Although, in substance, these different definitions are broadly similar as they both identify a wholesale market, they do not coincide as regards large end customers directly supplied by producers, which are part of the supply market to end customers under the traditional definition, but also fall under the wholesale market in the distinctions adopted in Phase II decisions.26 21 22 23 24

25 26

See e.g. cases M.5911, paragraph 21 and M.7131, paragraph 29. M.3696, paragraph 224; M.5978, paragraph 15; and M.7137, paragraph 28. Case M.1673, paragraphs 13-19. Case M. 5467, paragraphs 231 to 234: the wholesale market is expressly defined as the market of imports and generation of electricity for further resale. This contrasts with earlier decisions on the German market where the Commission identified a wholesale market for the supply of electricity at transmission level including large industrial customers supplied at transmission level (Case M.1673, paragraphs 13-19; confirmed in M.2349, paragraph 11 and M.2801, paragraph 18). See e.g. cases M.5911, paragraph 21 and M.7131, paragraph 29. In Spain, following the definition formulated by the Spanish Competition Court, the Commission defined the wholesale market as including electricity that is bought and sold through the pool and via bilateral contracts, including, on the demand side, in addition to the distributors and the traders, the large eligible customers (cases M.2434, paragraph 19 and M.2684, paragraph 22). Still in relation to Spain, the distinction between wholesale and retail was adopted in the recent Phase I decision in case M.3448, paragraphs 11-15. In Sydkraft case M.3268, the Commission also included large customers in the wholesale market

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For example, in its Phase II decision in Verbund/Energie Allianz ( June 2003),27 concerning the Austrian market, the Commission specifically addressed the question whether large customers should be included within the end supply market or the general wholesale market. Firstly, it excluded that supply to large end customers was part of the same market as supply to small end customers.28 The Commission then examined whether distributors and large end customers were part of the same market. Because small distributors supply mainly households and small firms, both their purchasing behaviour and their power requirements differ from that of large end customers. This was supported by the Commission’s market investigation which showed that less favourable terms were generally offered to small distributors than to industrial and large end commercial consumers. Further large end customers, smaller distributors have to compete with other larger distributors to supply certain categories of final consumers. For the Commission, these factors suggested the existence of separate markets for supply to large customers and small distributors; it however left the precise market definition open.29 In a different approach, in DONG/Elsam (March 2006),30 TenneT/Elia/Gasunie/APX-Endex (September 2010)31 and EDF/Dalkia ( June 2014),32 large customers were included in the wholesale market, whereas in E.ON/Mol (December 2005)33 and KGHM/Tauron Wytwarzanie ( July 2012),34 they were considered to be part of the end user market and separate from the retail supply markets. In GDF/Suez (November 2006), the statement was made that “big commercial and industrial customers may, under certain conditions, be part of the wholesale market”.35

27 28 29

30 31 32 33 34 35

(paragraphs 15 and 31), although distinguishing from a market for supply to end users. In the merger control prohibition decision on the joint acquisition of the incumbent Portuguese gas company GDP by the Portuguese ex-incumbent electric company EDP and ENI (case M.3440), a distinction was made between wholesale and retail but supply by generators to end-customers was included in retail (wholesale supply was limited to resale to retailers (paragraph 37) and retail supply was defined as the sale of electricity to the final consumer (paragraph 56)). Case M.2947, paragraphs 32 & 41-42. See below, book paragraphs 2.34-2.55. Case M.2947, paragraph 41. The parties had argued that the small distributors should be included among the service oriented customers, along with industrial and large commercial consumers. They pointed to similar prices, similar purchasing behaviour, and a need for additional services alongside the necessary power itself. Case M.3868, from paragraph 230. Case M.5911, paragraph 21. Case M.7131, paragraph 29. Case M.3696, from paragraph 236. Case M.5979, paragraph 11. Case M.4180, at paragraph 675.

15

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2.1.3 Submarkets within the wholesale market 2.27

The possible distinctions (or sub-markets) within a wholesale market considered by the Commission concern power exchanges and the recognition of different levels of distribution.

2.1.3.1 Power exchanges and wholesale 2.28

The Commission has not considered that a separate “electricity exchange” market for electricity exists, and this is typically viewed as an integral part of the wider wholesale market. For example, in relation to the Nordic, the Italian, the Spanish, the Belgian and the UK markets, the Commission has concluded that the wholesale electricity market covers both electricity sold on the basis of bilateral contracts and the exchange markets.36 In relation to the Nordic spot market, the Commission came to this conclusion on the basis that producers would easily be able to substitute between these different markets in reaction to permanent price differences. In the more recent DONG/Elsam decision (March 2006), the Commission however envisaged a distinction between electricity sold on the basis of bilateral contracts and on the spot market, as access to the Nordic spot market was difficult for small retail suppliers. The precise market definition was left open.37

2.1.3.2 Distinction according to the level of distribution 2.29

In Verbund/Energie Allianz ( June 2003),38 within the framework of the Austrian market, the Commission recognised the existence of a product market for the supply to small distributors, including all the municipal and local utilities and private utilities, distinct from supply to large, or “regional”, distributors. Contrary to large distributors, small distributors with an annual consumption 36

37 38

As regard the pool Spanish exchange see case M.2434, paragraph 19 and M.2684, paragraph 22. For the Nordic spot market see M.3268, paragraphs 19-20 where the Commission left open the precise market definition. For the Italian market, see M.3729, at paragraph 28, where the Commission stated that the wholesale electricity market encompasses the production of electricity at power stations and the import of electricity through interconnectors, whether sold bilaterally or through IPEX . For the Belgian market, see M.5978, paragraph 69, where the Commission identified a wholesale electricity market comprising electricity generation, imports and trading on organised markets (e.g. the power exchange) or over the counter, for both physically and financially settled products. For the market in Great Britain (i.e. England, Wales and Scotland), see M.5224, paragraph 17, where the Commission concluded that the market investigation did not support the definition of narrower product markets, but rather favoured the definition of one wholesale electricity market comprised of various segments. M.3696, paragraphs 230 to 232. Case M.2947, paragraphs 38-40.

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below 500 GWh were found not to have the financial and administrative capacities to purchase electricity on the trading market. They also do not normally purchase balancing energy separately. These distributors were therefore usually supplied under long‑term, stable, “ full” supply contracts (making it unnecessary for them to buy or trade additional energy, and including the delivery of balancing energy). The same conclusion was reached in relation to Germany, where the wholesale market was subdivided vertically between (i) national distributors connected at transmission grid level, (ii) regional suppliers, and (iii) local distributors consisting mainly of municipal electricity companies39.

2.1.3.3 Regulated part of the market In Eon/MOL (December 2005), the regulated segment of the market, in which power generators supply electricity to the public utility wholesaler for public utility purposes according to a “single-buyer” scheme, was deemed to constitute a distinct market. The Commission however considered that, with full market opening, this market was to progressively become part of the same product market as the wholesale supply of electricity to other traders.40

2.30

In Romanian Power Exchange (March 2014), the Commission examined possible abusive behaviour by Romania’s only power exchange. While not explicitly confirming the existence of separate markets, the Commission, in its assessment, distinguished between the regulated wholesale electricity market, and the competitive wholesale market.41 The regulated wholesale electricity market in Romania concerned those wholesale transactions for the supply of customers with electricity at regulated prices, concluded bilaterally between certain designated generators and suppliers of last resort under the regime set by Romania’s energy regulator. To the contrary, electricity on the competitive wholesale market was traded at freely agreed prices, either bilaterally, brokered or via a power exchange.

2.31

2.1.3.4 Peak hours and off-peak hours In RWE/Essent,42 the Commission envisaged a distinction within the market for generation and wholesale supply between “peak hours” and “off-peak hours” (and even a further distinction between peak and “super-peak hours”). The dis39 40 41 42

Case M.1673, paragraphs 13-19; confirmed in M.2349, paragraph 11 and M.2801, paragraph 18. Case M.3696. Case AT.39984, paras. 33 and 35. Case M.5467, para 25. The distinction was made in earlier case such as the Phase II decision Dong/Elsam of March 2006 (Case M.3868) in relation to the geographic market definition (see the section on Denmark in the geographic market definition part).

17

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tinction had been made by the Dutch Competition Authority (the “NMa”). The response to the market investigation was however inconclusive in this regard and the Commission left open this market definition.

2.33

This was again assessed in KGHM/Tauron Wytwarzanie43 in the context of the Polish market. Again, the Commission’s market investigation showed that such further sub-segmentation of the wholesale electricity market according to peak and off-peak hours was not warranted. The Commission confirmed this approach in EDF/Dalkia.44

2.2 Retail supply to final customers 2.34

The market for the supply to final customers has been given different names by the Commission, sometimes describing it as “the sale of electricity to the final customer”,45 alternatively referring to it as a market for “retail customers” excluding very large consumers46 (i.e. those connected directly to the transmission grid or directly supplied by generators, and included in the definition of the wholesale market). The main distinctions referred to by the Commission within this market definition concern (i) eligibility and (ii) size.

2.2.1 Supply to eligible customers and to the regulated market 2.35

Relevant product markets in the electricity sector must be defined according to the existing degree of liberalisation. This is made clear by the Commission in a number of decisions.47 In line with the distinction made by the Electricity Directive,48 eligible customers that are free to choose their supplier should be distinguished from non-eligible customers, who cannot yet choose their supplier and are therefore supplied by a national or local monopoly. The conditions of competition are obviously different for the two categories, and they are often subject to different regulatory frameworks, such as price controls for non-eligi43 44 45

46 47 48

Case M.5979, paragraph 17. Case M.7131, paragraphs 31-34. See e.g. cases M.2801, paragraph 8 and M.5979, paragraph 25. Definitions vary. In the recent decision case M.3448, paragraph 9 of 9.09.2004, the Commission refers to supply as “the delivery of electricity to the customer”. On a different point, it should be noted that, for the Commission, supply traditionally includes billing services (M.2890, paragraph 30 and M.3007, paragraph 12). See book paragraphs 2.24-2.26. See first in EDF/EnBW case M.1853, paragraph 19; and then in M.2434, paragraph 18; M.2684, paragraph 18; M.2801, paragraph 8; M.3448, paragraph 9; M.3440, paragraph 16; and M.5979, paragraph 11. See Volume I of EU Energy Law. Under the Electricity Directive, provided the Member Sates have complied with their obligations under the Directive, market opening applies, since July 2004 at least to all the non household consumers, and from July 2007, to all customers.

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ble customers. This essential distinction leads to the recognition of two separate sub-product markets for the supply of electricity (i) to eligible customers and (ii) to non-eligible customers.49 The supply of electricity to non-eligible customers is a legal monopoly in which there is no competition. The relevant product market must therefore be viewed in the context of the liberalised segment of the market: the Commission’s competition assessment always focuses on supply to eligible customers.50

2.36

With all customers being eligible under the Electricity Directive as from 1st July 2007, the above distinction should have now disappeared. However, some Member States have been granted transitional derogations from market opening.51 Moreover, under the legal framework of some Member States, such as France, Spain and Portugal, there are “regulated” eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until they have opted to purchase in the open “non-regulated” market. As regards the latter, the Commission clearly indicated in ENI/EDP/ GDP (December 2004) and E.ON/MOL (December 2005), that, in countries where eligible customers remain part of this so-called “regulated market”, all eligible customers should be viewed to be part of one and the same market.52 This analysis was confirmed in relation to the Romanian market: because all customers choose freely to be in the regulated or in the non-regulated system according to the price and the conditions in each system and the results of the market investigation indicated that there were no switching costs for the customers, the Commission took the view that all eligible customers should be considered, irrespective of whether they are in the regulated or in the non-regulated regime, as belonging to the same market.53 However, in French Long-term Contracts decision, the Commission considered that with regard to the French market, it may be appropriate to distinguish between eligible customs which have and have not exercised their eligibility. Such distinction was justified by a number of features

2.37

49

50

51 52 53

The statement of principle can be found in case M.1557, paragraph 23; confirmed by M.1803, paragraph 11; M.1853, paragraph 19; M.2857, paragraph 12; M.3075-3080, paragraphs 11-12; M.3210, paragraph 8; and M.3318, paragraphs 12-13. See, historically, the recognition of a market for supply (distribution) of electricity to non eligible household customers in Belgium in the old decision 493, 30. See cases M.3318, paragraphs 12-13; M.3075-3080, paragraphs 11-12; M.2857, paragraph 12; M.2684, paragraph 22; M.2434, paragraph 18; M.2353, paragraph 7; M.1853, paragraph 19; and M.1557, paragraphs 23 & 31-32. The Commission however considered, as regard the gas sector, that it could assess the foreseeable effect of a concentration on markets that will be opened to competition in the next years following a clear and binding calendar imposed under the Gas Directive (case M.3440, paragraphs 210-214). Malta, Cyprus and Estonia (see Volume I, at Chapter 11). Case M.3440, paragraphs 62-63 and M.3696, paragraph 238. Case M.4841, paragraph 16.

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specific to (i) the regulated sector and (ii) the price differentials between the regulated tariff and the price at which alternative suppliers are able to supply their electricity. In particular, the Commission considered that consumers currently supplied under regulated prices have little or no incentive to switch to an alternative supplier, even in the case of small but non-transitory variations in the regulated tariff and in the market price for those customers who have exercised their eligibility.54

2.2.2 Distinction according to size of customers 2.38

Among eligible customers, the Commission has traditionally distinguished between various groups likely to form separate markets according to their size. The distinction is strongly connected with the process of market opening as the size of customers normally corresponds to the evolution of market opening. The distinction is however also applied in fully liberalised markets.

2.39

It is logical that such a distinction should be made. Whilst in principle a company supplying a medium sized industrial undertaking can also supply households,55 in reality this requires very different faculties and expertise. However, in a number of Commission decisions no such sub-distinction is made; instead a single market for retail supply is identified, not differentiating between categories of customer according to size. This is not because the existence of submarkets is rejected but because it is not necessary for the competition analysis of certain cases. In cases concerning Finland, Sweden and Belgium, the Commission has however expressly accepted the possibility that the supply market to end customers may form one single market which could not be further segmented irrespective of the size, consumption level or consumption profile of the final customers.56 It is submitted that too much weight should not be given to these statements: in these cases, the precise market definition was left open by the Commission as the finding of sub-market for supply had no competition implications.57

54 55 56

57

Case AT.39386, paragraph 18. E.g.case M.3440, paragraph 64. For Finland and Sweden: case M3268, paragraphs 77-79. For Belgium: M.3318, paragraph 13; M.30753080, paragraph 12 and M.2857, paragraph 12. In none of these cases, has the Commission disclosed the reason for this finding. As regard Finland and Sweden, the party had submitted that the market could not be subdivided because market opening concerned all customers and contracts were standardised. In the Belgium cases, the party was dominant on the overall Belgium supply market; in the Nordic case, they were not dominant irrespective of the market definition.

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This is also supported by the fact that in later decisions regarding the Belgian retail electricity market, the Commission concluded that the market should be sub-segmented according to the traditional distinction between (i) large industrial and commercial customers connected to the transmission network (at above 70kV); (ii) small industrial and commercial customers connected to the distribution networks (below 70kV); and (iii) eligible household customers.58

2.40

In recent years, Phase II cases have reaffirmed that a general distinction based on the size of customers should be made.59 In E.ON/Mol (December 2005), for instance, the Commission concluded that large industrial and commercial customers, on the one hand, and small commercial customers on the other hand, were part of different markets as large industrial and commercial customers usually have professional staff and resources available to effectively negotiate and compare the various offers presented by the traders, usually open tenders for electricity procurement and seek offers from various market players. As a consequence, they usually receive individual offers tailored to their needs from their electricity suppliers, and are usually dealt with by so-called key-account managers by their commercial partners. On the contrary, small commercial customers have limited resources to compare terms and conditions and are characterised by a mass marketing approach from electricity suppliers. As a result of these distinct procurement patterns more industrial and commercial customers had switched supplier than small commercial customers.60

2.41

The different categories of customer identified by the Commission in specific cases differ somewhat, to reflect the specificities of the different national markets. However, the following categories and criteria usually taken into account by the Commission can be identified.

2.42

2.2.2.1 Sub-markets according to the customers’ size The main distinctions referred to by the Commission to distinguish final customers according to their size relate to consumption level and customer type.

58 59 60

Cases M.4180, paragraphs 688-695 ; M.3833, paragraph 14 and M.5549, paragraph 131. M.3696, paragraphs 236 to 250; M.4180, paragraph 689, and M. 3868, paragraph 251. For recent Phase I decisions, see e.g. M. 5519, para 15 and 16; and M.5467, para 26-32. Case M.3696, paragraph 243.

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–

Consumption level

2.44

As regards consumption level, the Commission mainly distinguishes two markets: supply of electricity (i) to large customers and (ii) to small customers. The thresholds used are not identical in each case as they generally follow historical or current national regulatory frameworks.

2.45

In Austria, for example, the distinction was made according to the current regulatory framework, between customers with an annual consumption of less than 100 000 kWh a year, or a connected load of less than 50 kW (including private households, small businesses and farms) and bigger customers (referred to as industrial and large commercial consumers)61. The Commission’s market testing had not identified any grounds for further differentiation. In England and Wales, based on the historic timing of market opening, the traditional distinction was made in the past, in EDF/London Electricity ( January 1999)62 between customers with a maximum demand below 100 kW and customers with a demand of 100 kW and above. Similarly, in EDF/Dalkia ( June 2014), the Commission confirmed that the French retail electricity market for professional customers63 could be segmented into separate markets for the supply of electricity to: (i) large industrial clients whose annual consumption exceeds 7GWh; (ii) small industrial and commercial clients whose annual consumption ranges between 36kVA and 7GWh; (iii) small professional clients whose annual consumption does not exceed 36 kVA. Although never reaching a definite conclusion on the issue, in several cases, the Commission suggested subdividing big customers into large and medium sized customers,64 or into “very large” and other large customers,65

2.46

–

2.47

Type of customers

Distinctions can also focus on types of customers according to their different consumption patterns or demand profile, instead of consumption volume. In more recent cases concerning England and Wales following market opening, a 61 62 63 64 65

Case M.2947, paragraphs 34-37. Case M.1346, paragraphs 13-17, confirmed in M.1606, paragraph 14; M.2209, paragraph 15; M.2801, paragraph 15; M.2890, paragraph 32; M.3007, paragraph 12 and JV.36, paragraph 27. Given that the transaction would have no impact on household customers, the Commission only examined the retail market with respect to professional customers. With a demand between 1MW and 100kW. See case M.1346, paragraph 17 as regard the English market. Such as the Austrian rail company ÖBB, although in this case the Commission s enquiries had not identified any grounds for this distinction (case M.2947, paragraphs 34-37).

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subdivision between three categories of customers was made on the basis of different tariff regulation: large commercial and industrial enterprises, small and medium-size enterprises, and household customers.66 With respect to Nordic countries, many replies to the market testing in Sydkraft/Graninge (October 2003)67 suggested the same division into large industrial customers, smaller commercial customers and households. A similar conclusion was reached in KGHM/Tauron Wytwarzanie ( July 2012)68 with regard to the Polish market, which is segmented into (ii) industrial and institutional customers; and (ii) household users. In the Netherlands, however, although recognising a market for large customers, the Commission adopted a different distinction between medium sized customers on the one hand, and commercial/household customers on the other hand.69 In VEBA/VIAG ( June 2000), in a mixed approach combining voltage of supply with consumption level and customer type, the Commission made a distinction between (i) small customers, from low voltage networks, with an annual power consumption of less than 30 MWh, such as household, commercial and agricultural customers, and (ii) industrial customers from medium and high voltage levels70. This approach was also used in the recent ENI/EDP/GDP (December 2004), GDF/Suez (November 2006) and E.ON/Mol (December 2005) decisions71 as regards Portugal, Belgium and Hungary.72 With regard to Belgium, the Commission confirmed in EDF/Segebel that the retail electricity market could be segmented into (i) the market for the supply of electricity to large industrial and commercial customers connected to the transmission network (at above 70kV); (ii) the market for the supply of electricity to small industrial and commercial customers connected to the distribution networks (below 70kV); and (iii) the market for the supply of electricity to eligible household customers.73

2.48

2.2.2.2 Criteria In distinguishing submarkets on the basis of consumption level, customer type or a mixed approach, the Commission in substance relies on three criteria: the regulatory framework, consumption patterns, and voltage of supply. 66 67 68 69 70 71 72 73

Cases M. 5224, para 85 to 87; M.3007, paragraphs 13-14 and M.2890, paragraph 32. Case M.3268, paragraph 78. Case M.5979, paragraph 28. Case M.1659, paragraph 7; but see below the approach taken in the more recent RWE/Essent (Case M.5467, para 58). Case M.1673, paragraph 17, referred to in M.3173, paragraph 8. Cases M.3440, paragraphs 33 and 64-73; M.4180, paragraph 689, and M.3696, paragraphs 236 to 250. See also more recent cases: Case M.5512, para 14 M.5224, M.5496: M.5467 and M.6984, paragraph 28. Case M.5549, paragraph 131.

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–

2.50

2.51

2.52

2.53

Regulatory framework

The evolution of market definitions in England & Wales shows that different regulatory frameworks can play a strong role in the finding of different product markets. Following full market opening, the traditional market definition distinguished between small, medium and large customers according to their consumption level, in line with the pace of liberalisation for these different classes of customers.74 In addition to the different competitive conditions stemming from the timing of market opening, the rationale behind the distinction was that small customers, with an annual consumption below 100kW, were still protected by regulatory maximum prices (price caps) after market opening.75 Three years after market opening to all customers, and a few months after the suppression of price caps, the Commission, in EDF/Seeboard ( July 2002), put into question the above traditional distinction as becoming “ increasingly meaningless”. It suggested to follow the new regulatory framework distinguishing three categories of customers according to the tariff structure applicable to them and their different right of negotiating their supply contracts: complete freedom to negotiate for large customers, limited freedom (with standard terms) for SME’s and no negotiation power at all for domestic customers.76 In E.ON/Mol (December 2005), domestic customers were considered as a separate market on the basis that the market was not yet open for them.77 – Consumption patterns The distinction between different types of customers often relies on the finding of different consumption patterns or demand profiles.78 The Commission highlighted the differences between the demand behaviour of large customers and “mass” customers in Verbund/Energie Allianz ( June 2003) concerning the Austrian market.79 74 75 76 77 78 79

The England & Wales market was opened in 1989 for customers with a consumption above 1 MW, in 1994 for customers with a consumption above 100 kW, and in 1999, for all customers. Case M.1346, paragraphs 13-14; M.1606, paragraph 14. In a later decision, the Commission referred, more generally, to the fact that supply to small customers was generally subject to specific rules and regulatory supervision ( JV.36, paragraph 27). Case M.2890, paragraphs 30-33, see also M.3007, paragraphs 13-14. The traditional distinction was however still considered in later cases JV.36, paragraph 27 and M.3007, paragraph 12. Case M.3696, paragraph 239. See Case M.3007, paragraphs 13-14; M.2890, paragraph 32; M.3268, paragraph 78; and M.1659, paragraph 7. Case M.2947, paragraph 36. See also, very recently, the same reasoning as regards the Portuguese market,

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For the Commission, as far as Austria was concerned:

2.54

“large customers are usually more price‑sensitive, and correspondingly more ready to change suppliers than small customers are. Negotiating power and conduct of negotiations are also different. This is reflected in different sales strategies adopted by the energy suppliers and a different level of prices. For large customers value for money and flexibility of supply are the major consid‑ erations, while for mass customers there is a further marketing differentiation ( for example between ‘clean energy’, especially from domestic hydroelectric sources, and electricity from fossil fuels or nuclear energy), and a qualitative approach to custom‑ ers.” In an earlier decision concerning the English market, the fact that small customers were less “sophisticated”, and had a weaker reactivity to prices as electricity is not for them a major item of expenditure, had already been stressed.80 The fact that sales forces are usually different for each group of customers was also considered by the Commission as supporting the distinction between big and small customers.81 The different switching rates of the different categories of customers have also been used.82

2.55

In DONG/Elsam (March 2006), the Danish market was divided into customers with and without hourly metering requirements as there was no arbitrage possibility between them, they pay different prices, consume different products (metered/non-metered) and purchase in different ways (negotiation vs. standard purchases).83 In a more recent case concerning Great Britain, the Commission has also distinguished, in addition to domestic customers, between smaller industrial and commercial customers (SMEs) which do not use “half hourly rates” and large industrial and commercial (“I&C”) customers which do use half hourly rates.84

2.56

In RWE/Essent of June 2009, the retail German market was divided into supply of (i) large/industrial (load-measured/individually metered) customers and (ii)

2.57

80 81 82 83 84

M.3440, paragraphs 66-71. Case M.1606, paragraph 14. Case M.2890, paragraphs 30-33. Case M.3440, paragraph 69. M. 3868, paragraph 251. See also the reference to small customers that are non half hourly metered in M.5512, para 14. Case M.5224, para 85 to 87.

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household/small commercial, agricultural (non-load measured) customers.85 The differentiation between the two groups is due to different needs and profiles on the demand side and different services and technologies offered on the supply side. The distinction follows the distinction made by the German Federal Cartel Office which is based on the argument that load measured customers have greater price elasticity, a structured demand profile due to their need of differentiated products and as a consequence different buying power and behaviour as opposed to non-load measured customers, which instead require simple products and uniform tariffs. –

Voltage level and connection capacity

2.58

The voltage level of supply was key to the finding of two distinct markets for large and small customers in Germany in VEBA/VIAG ( June 2000).86 More recently, as regards the Austrian market, in Verbund/Energie Allianz ( June 2003), the Commission similarly took into account, in distinguishing between large and small customers, the impact on the pricing structure of the voltage level at which customers are supplied: “the lower the voltage at which current is delivered, the higher the share of the entire bill accounted for by the grid itself ”, and as a consequence “the relative advantage to the customer of a change of suppliers is lower at lower grid voltages with higher grid prices”.87 This distinction of principle between large/industrial and small customers respectively connected to the high and low voltage grid can also be seen in some more recent decisions.88

2.59

In RWE/Essent of June 2009,89 in relation to the Netherlands the Commission relied on a distinction based on connection capacity in line with the Dutch competition authority (NMa). The NMa distinguished between small scale users with a maximum transmission value of 3.80 A (kleinverbruikers) and large and medium sized users with a maximum transmission value of more than 3.80 A (grootverbruikers). The NMa considered that different competition conditions apply to low-volume users in relation to consumption profiles, sales and marketing, price structure and delivery conditions. Furthermore, medium and high volume end users also show more evidence of willingness to switch suppliers than low-volume users. Finally, only suppliers of “ kleinverbruikers” are obliged to have a licence to supply. 85 86 87 88 89

Case M.5467, para 282; see also before Case M.5496, para 14. Case M.1673, paragraph 17. Case M.2947, paragraph 37. See also GDF/Suez (November 2006) and E.ON/Mol (December 2005), cases M.4180, paragraph 689, and M.3696, paragraphs 236 to 250. See Case M.5512, para 14 M.5224, M.5496, M.5170 and M.5467. Case M.5467, para 58.

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2.3 Conclusion Although, as the market develops and electricity customers become more sophisticated (thus possibly slowly eroding the difference in supply conditions between large industrial, commercial and domestic clients), this basic distinction – which runs through all decisions, is likely to remain for the foreseeable future. The precise delimitation between these different groups will depend upon the circumstances on the market in question, due to the differing regulatory frameworks, commercial patterns and voltage levels, but on final analysis will probably largely pursue the following distinction: –

supply to large customers with the exception of very large customers connected directly to the transmission grid (i.e. steel mills etc).90 The large customers falling within this category will be sophisticated purchasers, having considerable negotiating power and capable of actively shopping around for a supplier;

–

supply to medium-sized customers, usually purchasing from distributors, but sufficiently large to actively seek alternative suppliers;

–

eligible households and small commercial customers.

3.

Electricity trading

2.60

3.1 Introduction Three key issues must be addressed in relation to market definition in the electricity trading sector: (i) the existence of a trading market distinct from a wholesale supply market, (ii) the distinction between physical and financial trading, and (iii) the recognition of a wider energy trading market.

2.61

3.2 A trading market distinct from wholesale supply Energy trade has traditionally been identified as a distinct market from generation/wholesale and supply91 as, for the Commission, (i) it requires specific know90 91

Usually included within the wholesale market. See book paragraphs 2.20-2.30. The trade market was first formally identified in EDF/Louis Dreyfus in case M.1557, paragraph 22, and then in JV.36, paragraph 25; M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; and M.3306, paragraph 8.

27

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how, (ii) it is often characterised by short term contracts, (iii) it does not always give rise to physical delivery, (iv) it does not always concern final consumers and (v) the same undertakings are not always present in trade and supply.

2.63

Electricity trading is generally defined as “the buying and selling of electricity at one’s own risk and for one’s own account”,92 or as “the purchase and resale of electricity which is not necessarily directed to final consumers”.93 For the Commission, it involves the following activities:94 1.

over‑the‑counter (“OTC”) trading, where individual bilateral contracts are negotiated between supplier and customers or via brokers outside any exchange;

2.

the physical trade of electricity on exchanges; and

3.

trade in non‑physical financial derivatives.

2.64

As regards the structure of the electricity trading market, the Commission has stated that electricity traders include: “ in addition to independent traders with no generating capacity or grid of their own, on the supply side and to some extent on the demand side as well, electricity generators, distributors and importers”.95

2.65

It may be argued that within liberalised markets, the distinction between trade and wholesale supply has become increasingly difficult to sustain. Indeed, as suggested by the parties in various decisions,96 because the business of a distributor largely matches the accepted definition of electricity trading, namely the purchase and sale of electricity with a view to a gain, there is prima facie little reason to distinguish supply to distributors from a wider electricity trading market.97 92 93 94 95

96 97

See 1673, 18; confirmed in 2947 46, 47. The Commission clearly stated, in relation to the German market, that, as a consequence, agency activities which do not bear the marketing risk are not trading activities (M.1673, paragraph 18). Case JV.36, paragraph 25. Case M.2947, paragraph 47. Case M.2947, paragraphs 46-47. A very similar definition was already given in Veba/Viag, the Commission adding at the time that trade takes place at all voltage levels (M.1673, paragraph 18). Similarly, in relation to the UK market, the Commission stated that generators and exporters bilaterally sell electricity to operators supplying end users (suppliers) or to traders (who will in turn trade it to other traders or sell it to suppliers (M.2890, paragraph 14; M.2801, paragraph 12); or defined trade as a subset of the overall interaction of generators and suppliers in the vertical chain (M.2801, paragraphs 13 and 19). See Case M.2947, paragraph 38. For the opposite statement by the parties in a recent decision, see M.2801, paragraphs 13 and 19: The parties indicate that direct sale between generators and suppliers should not be included in the notion of trading in order to separate the trading activity from the markets of generation and supply. It is not entirely clear whether the traditional distinction of trading also means that, at retail level, a market

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Until recently, the Commission seemed to hold strong to the traditional distinction between supply and trade.98 In Verbund/Energie Allianz ( June 2003), for example, the distinction between wholesale supply and trading was expressly addressed.99 The Commission came to the conclusion that a separate relevant product market for supply to large regional suppliers, distinct from the trading market, was likely to exist. The issue was however left open, as the transaction did not create or strengthen a dominant position on this market. It is worth quoting the Commission’s analysis which led to this conclusion: ‘The Land corporations (big distributors) essentially supply final consumers (large customers and tariff customers) and smaller distributors. (…) the Land suppliers’ customers usually take all of their electricity requirements (beyond what they gener‑ ate themselves) from one and the same supplier. To guarantee their customers full supply of this kind, the regional suppliers depend on long‑term fixed contracts for the greater part of their electricity requirements at least. For this reason most of the electricity required by the Land suppliers cannot be met through short‑term exchange dealings. Whether more long‑term supplies purchased OTC on the open market would be sufficient is not clear from the Commission’s enquiries; at least one regional supplier stated that the electricity trading markets had not got the necessary liquidity for this either”. As regards smaller distributors, it was even more clear to the Commission that demand for electricity from such companies, including all the municipal and local utilities and private utilities, was part of a different market than the trading market.100

2.66

2.67

While the Commission’s analysis in Verbund/Energie Allianz suggests that the distinction between trade and supply is not as incontestable, it still supports, at least within the Austrian market, the distinction between trading and wholesale supply activities.

2.68

However, more recently, the Commission has moved towards a view that a single market may exist for electricity wholesale, including trading. For example,

2.69

for supply by traders to end consumers should be distinguished from supply buy suppliers or distributors to end consumers. In relation to the Spanish market, the Commission considered only one overall market at retail level encompassing the electricity offered by traders and suppliers to eligible customers (case M.2434, paragraphs 19 & 26). 98 Cases M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; M.3306, paragraph 8; M.3696, paragraph 227 to 229 and M.4180, paragraph 677. 99 Case M.2947, paragraphs 43-50. 100 Case M.2947, paragraphs 32 and 38-40.

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in several cases, market shares have been calculated based on a wider market including wholesale traders and distributors. In none of the more recent decisions concerning the English and Welsh market, for instance, is a trading market referred to101 and in the recent EDF/British Energy of December 2008, the Commission clearly rejected any segmentation of the wholesale market.102 This was again upheld in the GDF Suez/International Power decision of January 2011. In the same way, in countries with a market based on an electricity exchange such as Spain, the wholesale market is considered to be part of a wider market encompassing electricity sold to distributors and to traders, as well as electricity sold from traders.103 Similarly, in the recent Sydkraft/Graninge (October 2003)104 and DONG/Elsam (March 2006)105 decisions, no distinction was made between electricity sold through the Nordic spot market, Nord Pool: all trading activities going through the exchange, including short term trading, were included in the wholesale supply market. As regards the Netherlands, in RWE/Essent, the Commission also concluded as to the existence of a wide wholesale market encompassing electricity bought and sold through energy exchanges (day ahead, intra day and spot market platforms) and through bilateral contracts).106 In RWE/Essent the Commission highlighted that the Report of the Sector Inquiry “showed that there is no reason to consider physical trading as distinct from other wholesale sales of electricity where two parties agree on a price and other terms for a physical supply of electricity”.107

2.70

With regard to the Belgian market, in earlier decisions the Commission had indicated that separate markets could exist for (i) electricity generation and electricity imported to be sold on to retailers and (ii) electricity trading, where 101 See case M.3007, paragraphs 10 and 32; and M.2890, paragraph 14 (with the statement, under Generation and supply that: “Generators and exporters bilaterally sell electricity to operators supplying end users (suppliers) or to traders (who will in turn trade it to other traders or sell it to suppliers)”. In previous decisions concerning England & Wales, the reference to trade as a distinct market was also not made in M. 1346; M.1606 and M.2209, but was made in M.1557 and JV.36. 102 Case M.5224, paragraph 19. 103 In Spain, the Commission recognises the existence of one overall market encompassing both the electricity offered through the pool and bilateral contracts (cases M.2434, paragraph 19 & M.2684, paragraph 22). 104 Case M.3268, paragraphs 16-19. This includes, namely, the Elspot market for physical trading of electricity for next day delivery, and the Elbas continuous physical market for balance purposes, i.e. trade in electricity closer to delivery time than the Elspot market. See paragraph 19: “generation and wholesale of electricity constitutes a separate product market. The market encompasses electricity sold on bilateral contract as well as electricity sold on Elspot and Elbas”; see also paragraph 16, under wholesale supply, “electricity can be traded on the wholesale market in a number of ways” (see also in paragraph 31 the reference to electricity suppliers and traders in relation to the competition analysis). See also, as regard the Portuguese market, M.3440, paragraph 31. 105 Case M.3868. 106 Case M.5467, paragraph 23. 107 Case M.5467, paragraph 52.

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electricity is bought and sold, not necessarily with a view to being supplied to a final customer. However, in EDF/Segebel (November 2009), the Commission’s market investigation showed that the conditions of competition on the Belgian market were sufficiently homogeneous so that electricity trading no longer had to be distinguished from other wholesale activities such as generation and import.108 Thus, it seems that the markets of electricity trading are becoming increasingly integrated, leading the Commission to consider a single wholesale electricity market in many countries.

2.71

3.3 Financial and physical trade Electricity trading can essentially be sub-divided into two main categories: “physical” trade of electricity and “non-physical” financial trading.109

2.72

Physical trading involves the delivery of electricity to suppliers and industrial customers through bilateral contracts (over‑the‑counter or “OTC” trading), as well as trade in physical electricity products on exchanges, the two activities being part of the same market.110

2.73

Financial trading involves trading derivatives based on electricity such as futures, forwards, options or swaps, based on financial settlement and not involving physical delivery. Financial trading is mainly used to reduce the risk for electricity traders stemming from high variations in the price of electricity due to differences in, for example, rainfall and temperature. To reduce this risk, market players can hedge their purchases and sales with these financial derivatives. Financial trading was defined by the Commission as “the trading of financial products suitable for providing insurance against the risk of unforeseen future price developments in physical electricity wholesale markets (financial hedging)”.111

2.74

The Commission had until recently not formally decided whether physical and financial trade are part of the same or different markets. In Sydkraft/Graninge (October 2003) and DONG/Elsam (March 2006)112 concerning the Nordic spot market Nordpool, where specific markets for financial derivatives have been

2.75

108 109 110 111 112

Case M.5549, paragraph 17. Cases M.2947, paragraphs 46-47; M.2801, paragraph 19, JV.28, paragraph 15. Cases M.3268; M.2684, paragraph 22; M.2434, paragraph 19 (in relation to wholesale supply). Case M. 3867, at paragraph 14. Cases M.3268, paragraph 65, and M. 3868, paragraph 246. See also M.3867 at paragraph 15.

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set up in parallel with the spot market for physical trade,113 the Commission’s market investigation strongly suggested, without however reaching any definitive conclusions, that physical and financial electricity trading were part of two different markets, although confirming that they are closely linked, having the same price as a common reference price. The more important difference, for the Commission, was that all financial electricity trading results in a mere financial settling of contracts without any physical delivery of electricity, whereas physical electricity trading obliges the supplier to physically deliver of electricity.

2.76

In Gas de France/Suez (November 2006), as the physical trade market was developed in Belgium, the Commission considered that it was not relevant to distinguish it from the financial trade market.114

2.77

In essence, financial trading is a service involving the trading of risk, whereas physical trading concerns the sale of electricity. As financial trading develops, a distinction should increasingly be made between the two activities.115 This is supported by the fact that the definition of trading, even in the most recent decisions, as “the buying and selling of electricity”, or “the purchase and resale of electricity” 116 would seem to include sale of energy not sale of financial products. In RWE/Essent of June 2009,117 the Commission concluded as to the existence of a financial trading market as a separate product market form wholesale and physical trade on the basis that “financial trading does not entail any commitment to supply electricity”.

2.78

To the contrary, in EDF/Segebel (November 2009), with regard to the Belgian markets, the market investigation showed a significant interaction between over-the-counter traded electricity products and electricity traded on organised markets. Similarly, sufficient interaction was found to exist between financial and physical products, as the former use the latter as underlying products. As 113 Eltermin, the financial market for price hedging and risk management when buying and selling electricity power, and Eloptions, the financial market for risk management and for forecasting future income and costs related to trade in electricity contracts. 114 Case M. 4180, paragraph 682. 115 In JV.28, paragraph 16 concerning the Benelux, the parties submitted that physical and financial trading are part of two distinct markets being carried out in a dissimilar way, in pursuit of different objectives, requiring different assets and resources, and involving different types of risk. The parties further submitted that the Commission has previously defined trading in financial derivatives as a distinct product market in 1122.8, including energy derivatives. In another case (M.2801, paragraph 19), however, the parties took the opposite view that physical and financial trades are part of the same market as they are used to hedge each other, it is possible to sell option contracts to deliver physical electricity at some time in the future, if the option is exercised, the contract results in a physical delivery, but if it is not, it would remain a pure financial transaction. 116 Case M.1673, paragraph 18; M.2947, paragraphs 46-47; JV.36, paragraph 25. 117 Case M.5467, paragraph 52.

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such, the Commission concluded there were no grounds to segment the wholesale electricity market further.118

3.4 On-line trading portal products In RWE/Essent of June 2009,119 the Commission looked into the possible existence of a potentially emerging new market for online trading portal products without reaching any definitive conclusion on its existence. Both RWE and Essent were acting as agent for CHPs (combined heat and power generation) and greenhouse operators in the wholesale market (APX or Endex) through an online trading platform to which anyone active on the wholesale market had access to sell or buy electricity. In the market test conducted by the Commission a slight majority of respondents, including the NMa, considered online trading portal products to be an integral part of the generation and wholesale market and not as a separate product market.

2.79

3.5 Facilitation of wholesale electricity trading In TenneT/Elia.Gasunie/Apx-Endex (September 2010),120 the Commission examined the previously undefined product market for the facilitation of wholesale electricity trading. APX provides services facilitating the trading of electricity in the Netherlands, the UK and Belgium by offering a trading platform and related services for short-term electricity contracts, which include daily auctions, day-ahead markets and intra-day markets, as well as long-term electricity contracts. APX is also active in ensuring market coupling between Belgium, the Netherlands and France, in cooperation with TenneT and Elia in their capacities as TSOs.

2.80

The notifying parties had proposed to define the product market as the market in which power exchanges facilitate electricity trading, more specifically offering a trading platform and related services to their members. Related services include acting as a central counterparty and ensuring the settlement of trades. The Commission considered that it is possible to distinguish between different services to facilitate electricity trading: (i) facilitation of short-term product trading (including day-ahead auctions, intra-day trading and day-ahead trading); (ii) facilitation of long-term physically settled contracts; and (iii) facilitation of long-term financially settled contracts. The market investigation concluded that

2.81

118 Case M.5549, paragraphs 19-20. 119 Case M.5467, paragraphs 68 to 74. 120 Case M.5911.

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a separate market for the provision of facilitation services for electricity trading may exist, but it was not conclusive whether further sub-segmentation according to short-term and longer-term products was appropriate.121

3.6 Wider energy trading market 2.82

The existence of a wider energy trading market extending beyond electricity to include gas, oil, etc, has on a number of occasions been argued by parties to a merger and the Commission has always formally left this question open.122 However, the existence of such a wider market for energy trade was put into question by several respondents to the Commission’s market investigations on the basis that trade of one product implies a good knowledge of the specificities of the market in question and of the evolution of supply and demand within this market, and that as a consequence traders, in practice, do not trade in all energy products.123 It is submitted therefore, that for the foreseeable future, such a wider market for energy trading is unlikely to be found to exist.

4.

Network infrastructure and related services

4.1 Transmission and distribution 2.83

In line with the Electricity Directive, the Commission has traditionally identified two separate relevant product markets for the transport of electricity: transmission and distribution.124 The Commission considers that the two activities require “ different assets and resources”, the market structures and conditions of competition being different for each.125 Distribution is further identified as a dis121 122 123 124

Case M.591,1 paragraphs 30-37. JV.28, paragraph 19; M.3210, paragraph 10; and M.1557, paragraph 17. Cases M.1557, paragraph 17; JV.36, paragraph 28. Or, sometimes, the low and medium tension local cables (1803,9 as regard the Italian market), or the conveyance of electricity from the national grid to consumers through a local network (2679,13;2890,17). Under the Electricity Directive, “transmission” is defined as “the transport of electricity on the extra high-voltage and high-voltage interconnected system with a view to its delivery to final customers or to distributors, but not including supply”, and “distribution” as “the transport of electricity on high-voltage, medium voltage and low voltage distribution systems with a view to its delivery to customers, but not including supply” (Article 2(3) and (5)). 125 See Cases M.1346, paragraph 12; M.1659, paragraph 7; M.3210, paragraph 8; M.1803, paragraph 9 ; M.3173, paragraph 8; M.3007, paragraph 10; M.2801, paragraph 8; M.2679, paragraph 8; M.1673, paragraph 11; M.1606, paragraph 10; JV.36, paragraph 25; M.2209, paragraph 10; M.2659, paragraph 8; M.2890, paragraph 17; M.1557, paragraph 22; M.3210, paragraph 8; M.3318, paragraph 12; M.3075-3080, paragraph 11; M.3268, paragraph 13; M.3440, paragraph 31; M.1949, paragraphs 10-12; M.3306, paragraph 8; M.3696, paragraphs 212 to 218; see also the recognition of a transport market in the early decision

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tinct market as “there are no alternative methods by which electricity can be delivered to its end-users”.126 This distinction was confirmed in RWE/Essent ( June 2009)127 and in TenneT/Elia/Gasunie/APX-Endex (September 2010).128 Following market opening, and the implementation of unbundling and third party access to electricity networks, these two activities should be clearly distinguished. Given the requirements of the second Electricity Directive with respect to unbundling, it is also clear that these services are distinct from generation/wholesale and supply.

2.84

Several recent decisions have established that transport activities for electricity, at both transmission and distribution levels, should be considered, at least at present, to be natural monopolies in the area covered, including internet connectors connected to the voltage level of the transmission network.129 In addition, for the Commission, each grid constitutes a separate market so that no overlap can arise from the addition of two networks.130 More recently, in Sydkraft/Graninge (October 2003) and E.ON/Mol (December 2005),131 the Commission, confirming that transmission and distribution of electricity was normally regarded as a natural monopoly, added that no competition concerns could normally exist as transmission and distribution grids are subject to regulated access and control by the network authorities,132 and are therefore not affected product market within the meaning of the Merger Regulation.133 In its analysis of the geographic market definition, the Commission in more recent cases however looked into the issue of substitutability of interconnectors.134

2.85

126 127 128 129 130 131 132 133 134

M.493, paragraph 29. Case M.2586, paragraph 9. Case M.5467, paragraphs 176 to 180. Case M.5911, paragaph 40. E.g.. cases M.3696, paragraph 212; M.5467, paragraph 177; M.5911, paragraph 39 ; and Case AT.39351, paragraph16. Case M.4841, paragraph 12 for Romania; M.3440, paragraph 34 as regards Portugal; M.2947, paragraph 27 as regards Austria; M.2340, paragraph 9 as regards Spain; and, implicitly, as regard the UK see M.2586, paragraph 11. Case M.3696. Case M.3268, paragraphs 72-74, as regard transmission and distribution lines in Finland and Sweden; this was in substance confirmed in M.3440, paragraph 34 as regard Portugal. M.3696, paragraphs 214 and 218. See the geographic market part below.

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In several recent decisions,135 the existence of a separate market relating only to the transmission of electricity involving a cross-border flow was considered.

4.2 Balancing 2.86

At any given point in time, the power being put into a network must be the same as the power being taken out. Otherwise the frequency will vary excessively and the lights will go out. However, electricity suppliers can never know exactly how much electricity their customers will use and there will inevitably be too much or too little power being put onto the grid. To maintain this balance, the transmission system operator (the “TSO”) normally buys “regulation power” to cover the imbalances of the market players136 and charges suppliers/customers for this “balancing” service. Balancing power enables the TSO to increase or decrease the electricity production, almost in real time, to maintain the overall balance between injected (produced) and withdrawn (consumed) electricity.137

2.87

In five decisions over the alst decade, EDP/ENI/GDP (December 2004), Sydkraft/Graninge (October 2003) Verbund/Energie Allianz ( June 2003), DONG/ Elsam (March 2006), and GDF Suez/International Power ( January 2011), the possible existence of a market for balancing services (or regulating power) was envisaged. In the five decisions, however, no final decision on this issue was reached.138 In Sydkraft/Graninge, the Commission concluded that the market for regulating power in the Nordic countries could be distinct from the wholesale market because of the specific characteristics of the provision of regulating power: due to the need to adjust production within short notice, requiring a high degree of flexibility and important available capacity, and the strong technical and financial requirements needed,139 only a limited number of suppliers can participate in this market. This was confirmed in DONG/Elsam as, for the Commission, balancing power was not traded on Nord Pool, the network op135 Cases M.5467, paragraphs 182 to 184; M.4922 and M.5154. 136 In M.2947, paragraph 52 the Commission identified three ways to provide balancing energy in a control area: (a) by adjusting the volume of electricity generated inside the control area (this is known as secondary regulation); or (b) by drawing on what is called the minute reserve, which is an additional regulatory instrument that can be called upon in the short term; or (c) if complete adjustment cannot be achieved either by secondary regulation or out of the minute reserve, by involuntary exchange between a control area and the surrounding UCTE control areas. 137 Case M.5978, paragraph 48. 138 Case M.3440, paragraphs 31 and 51-55; M.2947, paragraphs 51-54; M.3268, paragraphs 46-51; and M.5978, paragraph 57. 139 In the Nordic market, because the overall balance of the transmission system is at stake, to be authorised to supply regulating power, an operator on the balancing market must provide a guarantee for its economic liability. Bids have to be at least 10 MW and at most 500 MW.

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erators were the sole buyers of these services, the need to be able to launch extra capacity at very short notice distinguished both types of electricity/services and restricts the possibility of supply-side substitutability, and the pricing of regulating/balancing power was different from the rest of the wholesale market.140 In ENI/EDP/GDP (December 2004), it was concluded that the emergence of a market for balancing energy in Portugal was likely following full market liberalisation. In Verbund/Energie Allianz ( June 2003), the Commission however stressed the connection between supply and balancing, arising from the fact that the position of the parties in the provision of balancing energy could help strengthen their dominant positions on the supply market. In E.ON/Mol (December 2005), the Commission however clearly indicated that the provision of balancing energy constituted a separate market in Hungary as “the electricity used for system balancing is only produced by gas power plants as nuclear and lignite power plants do not offer the appropriate technical requirements (load charging, speed) and is purchased by the system operator at the national level”.141 The existence of a balancing market was also confirmed in GDF/Suez (November 2006) as regards the Belgian market.142

2.88

2.89

In Sydkraft/Graninge (October 2003), it was further suggested that a market for balancing energy could be divided into submarkets for (i) primary balancing regulation, where the physical balance in the system is adjusted by automatically increasing or decreasing the production in a number of power plants and (ii) secondary balancing regulation, where the physical balance in the system is made by manual adjustment which is carried out through power trades with the balance providers, when the primary regulation is not sufficient to restore balance in the power system. No conclusion was, however, reached.

2.90

In GDF Suez/International Power, the possible existence of a separate market for balancing power in the UK was examined. While it ultimately left open the exact product market definition, the Commission indicated towards a market for balancing power, separate from the wholesale market, balancing power services are procured through specific mechanism pursuant to license conditions and are designed to meet specific technical issues resulting from the management of the transmission system.

2.91

140 M.3868, paragraphs 235 to 239. 141 M.3696, paragraph 222. 142 M.4180, paragraph 683.

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In that regard, balancing power services are not completely the same as those services relevant to the electricity generation and wholesale market.

2.92

Also, the market investigation showed that there were different types of balancing power services: (i) frequency response, i.e. the ability of generators to automatically and immediately increase or decrease generation levels at short notice in order to maintain system frequency within required limits; (ii) standing reserve (or short term operating reserve), i.e. the ability to produce output or reduce demand at very short notice; (iii) fast reserve, i.e. the rapid delivery of electricity through an increased output from generation or a reduction in consumption upon instruction of the TSO; (iv) warming/hot standby, i.e. the contingency reserve which can be used where a generation unit, that would normally take hours to start up, keeps warm to ensure a short notice to synchronise and start generation quickly. The Commission’s market investigation was however inconclusive as to whether each service constituted a separate market in and of itself.

2.93

In accordance with the Commission’s decisions in E.ON/Mol and GDF/Suez, it is submitted that there are good grounds for considering the existence of a separate balancing market. In a mature liberalised electricity market, the transmission system operator will obtain the balancing energy it needs from a specific balancing exchange, separate from the wider power market. Not all generators can participate in this market. “The cost of balancing is vital in enabling real competition to develop.143 Because of the nature of the service some forms of generation (notably hydro) are particularly suited to balancing.” Thus, a merger between two firms with a limited share of the overall generation/wholesale market may have a much greater impact on competition if they have a large share of the balancing market.

4.3 Network asset management, operation and services 4.3.1 Introduction 2.94

In electricity markets that have been liberalised for some time the maintenance and operation of the network, traditionally done by the owner of those assets in the electricity, gas and water industries, is increasingly being carried out by independent contractors, leading to the emergence of a competitive market. The question of the recognition of a product market for such network services distinct from ownership of the network has therefore been raised. In two decisions concerning the UK market, the Commission suggested that, within 143 See below, book paragraph 4.158.

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the distribution market, a distinction could be made between the ownership of the network on the one hand, and the service for the operation of utility network assets144 on the other. In both decisions, the Commission left open the question of whether network asset management and operation forms a separate product market from the distribution of electricity, and whether, if it existed, it should encompass not only electricity, but also gas and water networks.145

4.3.2 Network services In the UK, in the wake of liberalisation, the authorities have gradually opened certain network related services to competition, such as the provision of connection and metering services that traditionally had been provided by the incumbent distribution company. The question has therefore been raised whether a specific market has developed for these services, or whether these activities were still part of the distribution market. Although the Commission envisaged the existence of connection and metering markets in several decisions, it has until now always left open the question as to whether it was a distinct market from distribution.146 Given the continued development of such services across the EU and the specific nature of the service, it is logical to consider that a separate market for such services now exists in countries where the service is outsourced by the network owner.

2.95

In a decision of August 2008 concerning the creation of the “European Market Coupling Company” (“EMCC”),147 the Commission looked at the existence of a market concerning the creation and operation of companies active in the provision of services in the congestion management services for cross border electricity transmission systems by market coupling.148 EMCC was set up to provide congestion management services for cross border electricity transmission systems by market coupling and a platform for a secondary trading of transmission

2.96

144 Case M.2679, paragraphs 14-15; and JV.36, paragraphs 22-24. 145 In JV.36, paragraph 23, the parties argued that the market covered the management and operation of electricity, gas and water networks, since identical management skills are required for each and the regulatory authorities set out certain criteria and standards that similarly apply to all three sectors. The Commission however considered that the management and operation of each type of network (electricity, gas and water) might constitute a different product market due to the different nature of the services. 146 With the limited exception of a market for the installation and distribution of devices that are used for the distribution of electricity, in Austria. See below, book paragraphs 2.102-2.104. 147 Case M.4922, paragraph 15. 148 Market coupling was defined by the Commission as a method for integrating electricity markets in different areas. With market coupling the daily cross-border transmission capacity between the various areas is not explicitly auctioned among the market parties, but is implicitly made available via energy transactions on the power exchanges on either side of the border (hence the term implicit auction). It means that the buyers and sellers on a power exchange benefit automatically from cross-border exchanges without the need to explicitly acquire the corresponding transmission capacity.

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rights in compliance with the requirements of the EC Regulation 1228/2003 on conditions for access to the network for cross-border exchanges in electricity.149 The Commission stated that it had not, to date, identified or defined any relevant markets regarding the creation and operation of companies active in the provision of services in the congestion management services for cross border electricity transmission systems by market coupling. It further stated that “with the eventual creation of other market coupling companies in other regions there could, in the future, be a separate market for electricity coupling services vis-à-vis interconnector/transmission system operators”. It concluded that “given that such companies have either not been yet created or they are in an initial set-up phase, such a market currently does not exist”.

2.97

In the sister decision also of August 2008,150 the Commission looked at the creation of CASC which was founded in order to provide cross-border capacity allocation services with respect to the interconnectors within the Central Western Europe region, also in compliance with the requirements of the EC Regulation 1228/2003 on conditions for access to the network for cross-border exchanges in electricity. The Commission indicated that it had not, to date, identified or defined any relevant markets regarding the creation and operation of companies active in the provision of services in relation to the allocation of transnational interconnector capacity (“auction offices”). It added that “given that such offices have either not been yet created or they are in an initial set-up phase, such a market currently does not exist” but that “with the eventual creation of other auction offices in other regions there could, in the future, be a separate market for auction office services vis-à-vis interconnector/transmission system operators”.

4.3.3 Connection services 2.98

Connection services involve the provision of new assets (e.g. cables or transformers) for the purpose of connecting a new customer to the existing electricity network (in particular the distribution network), the removal of assets from that network, either permanently or temporarily (for example during repair or replacement of equipment), and the alteration of assets within the network (for example to upgrade the capacity of the connection). It also includes the restoration of supplies (for example the reconnection of a street-light after its repair or replacement).151 The Commission has always left open whether the above ac149 EC Regulation 1228/2003 repealed by Regulation (EC) No 714/209 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the Network for cross-border exchanges in electricity, OJ L 211, p. 15. 150 Case M.5154, paragraph 22. 151 Case M.1949, paragraphs 13-14; M.2586, paragraph 10; M.2679, paragraph 15; M.2890, paragraphs 22-23;

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tivities should constitute a sub-market within a potential connection services market.152 Again, given the increasing trend towards outsourcing these services, it is submitted that in countries where they are outsourced, a separate market should be considered to exist.

4.3.4 Metering reading and operation Meter-related activities involve both the installation and operation of electricity meters for distributors (which generally own the meters), and meter reading and associated data processing activities.153 For the Commission, the two activities demand different skills and incur different responsibilities. In addition, meter reading will be more and more remotely, whereas meter installation will always require substantial human resources.

2.99

The Commission therefore considers that, if a market for metering activities were to be defined, it should be split in two distinct relevant product markets for meter installation/operation on the one hand and meter reading on the other154.

2.100

As regard meter reading, it was also suggested that a further distinction should be made between metering reading in relation to clients with half-hourly meters (i.e. meters that are to read consumption in each half-hour period which were required in the UK for certain categories of customers), and clients without half-hourly meters, as the characteristics of services provided to these two categories of clients were significantly different.155

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Finally, in a decision concerning Austria, the Commission seems to have accepted the existence of a market comprising “the installation and distribution of devices that are used for the distribution of electricity”, which arguably covers metering operations.156 Again, therefore, in countries where this service is out-sourced, it may be considered that such a separate relevant product market exists.

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M.3306, paragraph 9. 152 In JV.36, paragraph 24, the notifying parties identified the connection work in the electricity network as a separate market, although part of a wider market of utility network asset management and operation. 153 M.2890, paragraph 25; M.2679, paragraph 16; and M.1949, paragraph 15. 154 M.2890, paragraph 25. The Commission referred to the fact that skilled people are needed in order to carry out meter operation, while reading can be done by anybody. 155 Case M.1949, paragraph 15. 156 Case M.2513, paragraph 14.

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CHAPTER 3 The relevant geographic market – Electricity 1.

Supply

1.1 Introduction Before market opening in Europe, the geographic scope of the electricity supply markets in the Member States was, logically, no wider than national. As a consequence, companies involved in the production, transport and distribution of electricity are historically active on a national basis in Europe, and the structure of supply is therefore different in each country. In addition, before the Florence process and the subsequent Electricity Directive,157 regulatory frameworks were purely national and could strongly differ from one Member State to another.158

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As a result of the liberalisation process, mainly driven by Community law under the 1st, 2nd and 3rd Electricity Directives, but in some Member States, such as the UK, even in advance of this process, the situation has evolved.

2.104

Market opening, third party access and unbundling of transmission and supply are enabling foreign suppliers and electricity traders to progressively enter national markets.159 Companies have therefore often argued during merger proceedings that this process of market opening should be reflected in the definition of the relevant geographic market: the geographic market for electricity supply, at least at wholesale level, having evolved to a Community-wide market, or at least wider than national regional markets.160

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157 See Volume I, EU Energy Law. 158 See the description of the electricity markets in early decisions, in 1994 in case M.493, paragraphs 21 and 25; and in 1995 in M.568, paragraph 18. 159 See e.g. M.2947, paragraph 99. On the EC Electricity Directives generally see Volume I. 160 In addition to the legal opening of the markets to foreign suppliers, the main arguments raised by the parties

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Although, in early cases, the Commission has recognised that the process of liberalisation has opened the road to the creation of a market of Community dimension161, the existence of an EC-wide market for supply of electricity has, so far, never been accepted.162 Despite the liberalisation process, the relevant geographic market for the supply of electricity is still, in principle, national in scope.163 A trend towards a possible recognition of wider than national markets could however be seen in two decisions adopted in 2003. In Verbund/Energie Allianz ( June 2003), it was accepted that the market for electricity supply to large Austrian regional distributors could extend beyond Austria.164 Going one step further, in Sydkraft/Graninge (October 2003), it was concluded that the geographic scope of the wholesale market was “likely to be larger than Sweden”, encompassing probably at least Finland and Denmark. In both cases, the precise scope of the market was however left open. In both decisions, the specificities of the markets at stake should be highlighted. Interconnectors from Germany and Switzerland to Austria have significant capacity and are not congested, so there are no technical barriers to access to the Austrian market. In addition, part

161

162

163 164

in this regard relate to the increase in cross-border trade resulting from the liberalisation process. For the submission that the electricity supply market is of Community wide scope, see e.g. cases M.2701, paragraph 8; M.3173, paragraph 9; M.1659, paragraph 9; M.1673, paragraph 21; or a wider than national scope: see e.g. M. 5467, paras. 26-32 and 61, M.5467, M.2947, paragraph 56 or M.1557, paragraph 31. In addition to the legal opening of the markets to foreign suppliers, the main arguments raised by the parties in this regard relate to the increase in cross-border trade resulting from the liberalisation process. See the early decision M.568, paragraph 18 ( June 1995): “The regulatory frameworks may evolve and consequently national markets may develop into wider markets at some point in the future. However, they are to be considered as national, at least for the foreseeable future”. At the time, the decision was referring to the challenge by the Commission of the monopolies on imports in several member States (see Volume I). See also, even earlier M.493, paragraph 26; and later e.g. M.2792, paragraph 29; M. 2532, paragraph 34. See e.g. case M.3173, paragraph 9: “the parties view above markets as being EU-wide in scope. However, it is also true that a number of regulatory barriers to entry still exist in a number of large Member States and imports of electricity remain of a modest dimension”. Also see, more recently, case M.7137, paragraph 35, where the Commission confirmed that it generally considers the market to be national in scope, in particular due to the limited capacity and weakness of interconnectors between neighbouring Member States. See e.g. case M.1557, paragraph 32, invoking the limited capacities available on the interconnectors, the existence of significant price differences between Member Sates, or national regulatory frameworks; see also M.2684, paragraphs 23-26 and M.2701, paragraph 8. Cases M.2947, paragraphs 65 and 98-100. In its EDF/Seeboard decision (M.2890, paragraph 15), the Commission also indicated that the geographic dimension of the generation market could be broader than England & Wales considering the fact that the network was connected to Scotland and France but left open the definition (see the same statement more recently in M.3007, paragraphs 19-20). In the same case, the Commission made the same suggestion of a possible wider market for large customers (either above 100kW or non-domestic), but only in relation to Scotland (M.2890, paragraph 37; confirmed in M.3007, paragraph 24). As regard interconnections with France, in a more recent subsequent decision in August 2003, the Commission considered that the French market was likely to be national in scope, partly because of the limited interconnection capacities (M.3210, paragraph 11), closing the door to the recognition of a geographic market encompassing France, England and Wales. It is not excluded however, under the current case law of the Commission that a market for Great Britain, including Scotland could exist.

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of Austria is technically operated together with the German control block so that significant electricity imports from Germany have always taken place. As regards the Nordic countries, electricity markets were fully liberalised a number of years ago; the Nordic market forms an integrated power system in technical terms because of the existence of adequate inter-connectors between the national high-voltage transmission networks, and in commercial terms, because of the existence of a common wholesale electricity exchange, Nord Pool.165 Also, although the Commission eventually specifically limited the geographic scope of the market to France, several respondents in the market investigation in EDF/Dalkia ( June 2014) indicated the possible existence of one market covering France, Belgium, Luxembourg, the Netherlands and Germany.166

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Aside from these few cases, however, the Commission has maintained that markets remain no wider than national in scope. Moreover, three more Phase II decisions, E.ON/Mol in December 2005 concerning Hungary, Dong/Elsam in March 2006 concerning Denmark, and GDF/Suez in November 2006 on the Belgian market, have clearly demonstrated that, for the Commission, despite strong interconnections, important cross border electricity flow and regional market organisations, as long as significant congestions would exist between Member States, electricity markets will remain no wider than national. In all these cases, the precise delineation of the geographic scope of the market was key to the competition analysis and the commitments to be granted by the parties for the approval of the transaction by the Commission.

2.108

Due to its central position in Eastern Europe, Hungary is highly interconnected with its neighbouring countries. Moreover, imports represent a significant share of the national consumption. In spite of this, the Commission considered in E.ON/Mol that the Hungarian market was national in scope because the electricity interconnectors with Austria and Slovakia were almost all the time congested, the influence of imports on the electricity wholesale prices in Hungary being therefore limited.

2.109

165 Nordpool commenced its operation in 1993 comprising first only Norway. Sweden joined Nordpool in 1996, Finland in 1998 and Denmark in 2000. See the report: Relevant markets in the Nordic area, Copenhagen Economics (21.10.2002). The report is available on www.nordel.org. 166 Case M.7137, paragraph 38.

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2.110

In Dong/Elsam, the finding of Sydkraft/Graninge that a market encompassing Denmark East and Sweden was likely to exist was not confirmed. In line with a decision of the Danish Competition Authority in 2004, the Commission considered that the significant congestions between Denmark and the other Nord Pool areas, leading to separate price areas part of the time, prevented the existence of a wider than Danish market.

2.111

In GDF/Suez, despite strong interconnections and trade with France, the Netherlands and Germany, the Belgium market was considered to be national in scope because congestion from France to Belgium and from Belgium to the Netherlands allowed for no or little more electricity trade than the transit flow from France to the Netherlands. Congestions from Germany to the Netherlands also prevented exports of German electricity to the Belgian market. Even the introduction of market coupling and a common spot market between France, Belgium and the Netherlands did not modify this conclusion as it would not prevent congestions in particularly during peak hours.

2.112

In GDF/Suez, the Commission emphasised two further elements which may show that the acceptance of a wider than national market for electricity is a long way away. First, being a stable external supplier, with no local production, is particularly difficult when interconnectors are congested even to a limited extent. This is because congestions prevent external suppliers from committing on the uninterrupted supply and stable prices needed by its customers, and balancing requirements create additional uncertainty as to export planning. Secondly, the absence of a liquid trading market constitutes a strong obstacle to any supply strategy based on exports as electricity may not be available in the required quantities with the necessary flexibility.

2.113

The existence of a wider than European market was also especially relevant to the competition analysis in the E.ON/Endesa case (April 2006) as it concerned the merger of two European energy giants not located in adjacent territories. The Commission clearly confirmed that no wider than national markets existed because of the lack of available interconnection capacities: “The Commission considers in general that in light of Council Directive 2003/54/CE the possible emergence of wider than national markets needs to be examined. Based on the market investigation, the electricity markets in Spain, Italy, France, Poland and Germany are likely to be still not wider than national in scope. In particular market participants have pointed out that the lack of available interconnection capacity militates in favour of the persistence of national markets. In addition, according to third parties, price differences between Member States further con46

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firm the existence of national markets. Some of the respondents have referred to the emergence of a European-wide market and refer to a current trend towards promoting a single European market. The vast majority of the respondents have pointed out that a single European electricity market has not yet arisen.” 167 It should be highlighted that the Final Report on the Sectoral Enquiry into the European Gas and Electricity Sectors shows that almost all borders between Member States are congested and this congestion is increasing on most borders.168 The Final Report unequivocally concluded that “at the wholesale level, (gas and) electricity markets remain national in scope”.169 This overall strongly suggests that absent massive investments in stronger interconnector capacities, wider than national markets will not emerge. More recent decisions, following this report, have confirmed that markets wider than national ones, can yet been identified. In a decision of November 2009,170 the Commission concluded that the Slovakian market was national in scope even though in 2009 market coupling had been put in place between Slovakia and the Czech Republic. This was because trading volumes between the two countries were still low and the price differences between the two countries continued to exist. In the RWE / Essent decision of June 2009,171 the market investigation showed a notable price convergence in the Central West Europe region. The Commission however concluded that the German market was no wider than national due to congestion at German borders and the different competitive landscapes in the countries surrounding Germany. A slight but inconclusive opening towards the recognition of a wider than national market can be seen in the same decision concerning the Netherlands172 in which the Commission admitted as a possible market definition an area encompassing Germany and the Netherlands for off-peak hours. The rational for the finding was that during offpeak hours imports from Germany exercise a significant competitive pressure on 167 Case M.3883, at paragraph 21. The same statement was made in case M.4110, at paragraph 20. See also M.4180, GDF/Suez at paragraph 696. 168 See DG Competition report on energy sector inquiry (SEC(2006)1724, 10 January 2007), from paragraph 526. Available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html#final 169 Communication from the Commission – Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report) {SEC(2006) 1724}, at paragraph 14. The Commission also stated that “Cross-border sales do not currently impose any significant competitive constraint. Incumbents rarely enter other national markets as competitors. Insufficient or unavailable cross-border capacity and different market designs hamper market integration” (paragraph 21). The report is available at http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html#final 170 Case M. 5591, paragraph 11. 171 Case M.5467, paragraph 235. 172 Case M.5467, paragraphs 26-32 and 61.

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2.117

Dutch suppliers because during those hours there is more capacity available on the interconnector with Germany. The Commission however did not reach any conclusion on this possible market definition. In a number of cases the Commission has considered that markets are likely to be even smaller than national, being regional in scope. As regards the wholesale level, this issue was raised in countries which historically had strong local features, such as Germany, where the market opening process had a strong impact on the evolution from local to national geographic markets.173 At end user level, this issue is significant in countries where different distributors operate at regional or local level. The evolution in England and Wales, with a strong history of regional licenses, shows how the market definition for large, medium and small customers can evolve from regional to national markets in line with the liberalisation process.174 In these countries, however, it has been possible to see a logical progression from market definition being regional, to develop towards national. In all most recent decisions, the Commission refers to the fact that the market for retail supply of electricity including the market for supply to small customers is in principle no smaller than national under the condition that the market is “fully liberalised”.175 The evolution in Germany, for instance, however shows that even if market opening is legally implemented, remaining dominant local positions in the facts still hamper the finding of a national market at retail level.176 In the recent Electrabel/E.On decision of October 2009, the Commission therefore refers to “uniform” conditions of competition as a key criteria additional to liberalisation.177 In line with the Commission’s Notice on the definition of the relevant market, especially in relation to merger control, account must be taken of the ongoing evolutions arising from the process of market opening and the implementation of the Electricity Directive. It is clear however that wider than national market definitions, based on future developments, are only accepted when the developments will take place with certainty and in the short term. In Verbund/Energie Allianz ( June 2003), for example, the Austrian market for supply to large customers was deemed to be still not integrated with the German market, despite implementation measures of the Directive on market opening already having 173 A national market is now being recognised at wholesale level but not yet at retail level. See below, Germany, at book paragraphs 2.236-2.239. 174 See the developments in this regard concerning Austria, Belgium, England and Wales, the Netherlands, and the Nordic countries, from book paragraphs 2.206. 175 E.g. Cases M.5496, paragraph 15 and M.5512, paragraph 16. 176 See below, Germany, at book paragraphs 2.236-2.239. 177 M.5512, paragraph 16.

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been adopted or to be shortly adopted, since “the sought‑after results are not certain and immediate enough to justify the conclusion that the relevant geographic market is in fact larger”.178 In a similar way in E.ON/Mol (December 2005), the Commission did not take into consideration the potential market evolution in its assessment although noting that: “ it cannot be excluded that, in the future, depending on future developments such as changes in the regulatory framework, additional interconnection capacity and potential price convergence, the market for the wholesale supply of electricity to traders in Hungary will acquire a broader geographic dimension”.179 Another significant example is the rejection of an Iberian electricity market in all recent decisions, despite the agreement concluded by Spain and Portugal in November 2001 for the creation of an Iberian electricity market through the progressive convergence of the electrical systems of the two countries, as the agreement was not yet implemented.180 Only when developments will happen with certainty in the near future are they taken into account for the purpose of market definition.181 In VEBA/VIAG ( June 2000), for example, it was considered that the German wholesale supply market, although still showing strong local features, was already national in scope because it was without doubt going to develop into a national market in the foreseeable future.182 In Dong/Elsam (March 2006), the Commission examined the integrating effect of the Great Belt Interconnector cable connecting the East Danish and West Danish areas, and coming into operation after 2010, although stating that “both the remote time-frame and the uncertainty as to how strong that integrating effect will actually be limit the weight that the Commission can give to those effects”.183 In E.ON/Mol (December 2005), the Commission clearly indicated that, as soon as the non-eligible residential customers were 178 Case M.2947, paragraph 69. In the same decision, the Commission similarly took into consideration the fact that “ it cannot be assumed that developments in retail prices and in the prices for supplying small distributors in Austria and Germany will be driven by sufficiently homogeneous factors in the foreseeable future“ (paragraph 93), or that the opening up of the eastern control area to Germany was unlikely to change in the short term (paragraph 102). Another decision, concerning the German market does not take into consideration a possible increase of imports due to market opening because “ for want of specific pointers to the future development of exports, it is premature, however, at this stage to take account of such an, as yet, uncertain development” (1673,29). 179 Case M.3696, paragraph 267. 180 See below, Spain, at book paragraphs 2.277-2.278. 181 When the developments are not certain enough, they are normally taken into account within the competition assessment of the transaction, see e.g. case M.2947, paragraph 103. 182 Case M.1673, paragraph 32-45; confirmed in M.2349, paragraph 13. See below, Germany, at book paragraphs 2.236-2.239. 183 Case M. 3868, paragraph 261.

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not obliged to procure electricity from the regional distributors, the market for retail supply of electricity to residential customers would acquire a national dimension.184 In the RWE/Essent of June 2009, the Commission recognised185 that competition on the retail market in Germany is progressively expanding and that this could likely lead to the recognition of wider than local markets in the future but concluded that for the moment there are still strong indications pointing to local electricity retail markets.

1.2 Relevant criteria 1.2.1 Entry barriers 1.2.1.1 Regulatory trade barriers

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2.121

– Regulatory monopolies Prior to market opening, national production, transport and supply monopolies constituted absolute barriers to entry for foreign producers and suppliers. No significant cross-border trade of electricity could therefore take place between Member States, at least as regards final customers.186 At infra-national level also, before the liberalisation process, where exclusive distribution zones existed noneligible customers had no choice of electricity supplier, and were restricted to the supply company responsible for their geographic area: the geographic market was therefore necessarily limited to each exclusive local supply area.187 Under the Second Electricity Directive, Member States were under the obligation to implement market opening to all non-household customers by July 2004, and to non-household customers by July 2007.188 Before July 2007, the Commission’s market and competition analysis only covered the opened – or eligible – segment of the market.189 This analysis should no longer be relevant, subject however to the proper implementation of the Directive by the Member States. In a number of Member States, however, such as France, Spain and Portugal, there are “regulated” eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until 184 185 186 187

Case M.3696, paragraph 278. Case M.5467. See e.g. case M.493, paragraph 25 and M.1853, paragraph 21. See e.g. Cases M.1803, paragraph 21 for the Netherlands; M.1346, paragraph 25 and M.3007, paragraph 22 for England & Wales; and M.1673, paragraph 32 for Germany. 188 See Volume I. 189 See book paragraphs 2.35-2.37.

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they opt to join the free market and are supplied exclusively by the pre-liberalisation incumbent. – Licences Following market opening, the various authorisations to be obtained by new entrants to supply eligible customers can be seen as a barrier to entry. The requirement to obtain authorisations to supply electricity on the Belgian market from both national and local authorities was considered to be an administrative burden on foreign suppliers, constituting a barrier to entry to the Belgian market (see ECS/Sibelga (December 2003)).190 Again, in E.ON/Mol (December 2005), the Hungarian law obliging electricity traders set up a Hungarian trading company and obtain a Hungarian trading license in order to be active on the Hungarian market, and requiring a crossborder trading license to import electricity, was seen as clearly restricting the possibilities for any foreign company to pursue electricity trading and wholesale activities on the Hungarian market.191 – Price caps Market opening rules do not prohibit the imposition of price caps; a maximum price level fixed by the authorities. Following the opening of the English and Welsh market in 1999, the existence of price caps for small customers (with demand not exceeding 100kW), was until 2002 considered to be a strong indication of remaining regional markets limited to the historic distribution areas within England and Wales. In addition to creating different pricing conditions between the regions, as they applied locally, they could, depending on their level, hinder effective competition from developing in each region, therefore contributing to the historic operators maintaining their local positions.192 Following the abolition of the price caps by the UK regulator, Ofgem, in April 2002, it was considered that the relevant geographic market for supply had evolved 190 Case M.3318, paragraph 25. 191 Case M.3696, at paragraph 265. 192 Case M.1346, paragraph 25. In a subsequent decision, adopted a few months after the completion of the liberalisation process for small customers, the Commission less conclusively stated that local markets were likely to still exist (M.1606, paragraph 19). Price caps arguably did not prevent small customers from switching: almost one year and a half before they were abolished, it was already stated that “customer inertia appears to have reduced, and each month approximately 1% of all small customers change their electricity supplier, there do not therefore appear to be any significant barriers to switching suppliers”. As a result of the increased customer switching, it was concluded that, the relevant geographic market for supply was probably wider than regional (M.2209, paragraph 20-21).

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to probably wider than regional markets.193 Although these developments have no more than a historical interest in relation to the English market, the Commission’s reasoning could apply to other Member Sates where market opening for household customers is recent or has not yet taken place.

2.125

Equally, where a price cap is set at a very low level, this may deter new entry.194

1.2.1.2 Transmission rules and charges –

Transmission rules

2.126

In the absence of effective regulated third party access, the ownership by incumbent companies of transmission and distribution infrastructures de facto prevented entry by suppliers from other Member States or other regions within the same Member State even if third party access was legally required. In VEBA/ VIAG ( June 2000), for example, it was considered that the German market for the supply of electricity at wholesale level was likely to develop into a national market in the near future as rules for third party access to the transmission network had already been adopted.195 This conclusion was not altered by the fact that, for a transitional period, the new regulatory framework was not yet fully operational throughout the country, and that accounting procedures for balancing energy still made it more difficult for market participants to operate nationally. Despite the imperfections of the new regulatory framework, it was concluded that, in the near future, it would be possible to sell electricity everywhere in Germany at the wholesale level. The market was therefore no longer limited to the former regional supply areas, but was considered to be national in scope.

2.127

Under the Second Electricity Directive, Member States are, since July 2004, under the obligation to implement regulated third party access to the transmission and distribution network.196 In several Member Sates, the Directive is however not yet fully implemented. In any event, the quality of existing access rules must be taken into consideration. In a case concerning Belgium, ECS/Sibelga (December 2003), the fact that at that time no cross-border transmission contracts existed and, for foreign suppliers who wanted to enter Belgium a negotiation 193 Case M.2890, paragraph 34-35. 194 See the Commission s fourth Benchmarking Report (Communication from the European Commission to the European Parliament and the Council of 5.01.2005, Annual Report on the Implementation of the Gas and electricity Internal Market), available at http://europa.eu.int/comm/energy/electricity/benchmarking/doc/4/sec_2004_1720_en.pdf 195 Case M.1673, paragraphs 32-45. 196 See Volume I, Chapter 3.14.

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had to take place with the TSO, were considered to be barriers to entry suggesting that the Belgium market was not of a supra-national dimension.197 – Transfer charges Cross-border transfer charges are now abolished within the European Union.198 In the past, cross-border transmission fees charged by grid companies for transmission of electricity between Member States have been considered to be significant barriers to entry, depending on their level. As regards the German market, in particular, the transmission charge known as the “T-component”, to be paid by foreign suppliers wishing to export electricity to Germany, was considered to be a strong impediment to cross border trade.199 In the recent Verbund/Energie Allianz decision ( June 2003) concerning Austria, less weight was given to the cross‑border tariff, of 0.5 euros/MWh, to be paid for transmission of electricity between Germany and Austria.200 Because of the specific features of the Austrian market, the tariff acted as a barrier to entry only to a limited extent. As two Austrian control areas (the Vorarlberg and Tyrol control areas) were part of the German control block, routing electricity through this part of Austria made it possible to export electricity from Germany to Austria without paying any transfer charges.201

2.128

A requirement for transfer charges to be paid for the transport of electricity within different parts of the same Member State can similarly lead to the finding of local markets within a Member State. Despite the existence of two trading zones within Germany, and the payment of a transmission charge (the “T-component” referred to above), and although the charge was making it more difficult for independent electricity traders to operate nationally, the existence of a national German market was accepted in VEBA/VIAG ( June 2000).202

2.129

Given the new cross-border Regulation and the increasing elimination of regional charges at national level, this factor is unlikely to play an important role in future decisions.

2.130

197 Case M.3318, paragraph 25. 198 Since the entry into force of the EC Regulation No. 1228/2003 on cross-border exchanges in electricity in July 2004; and even since January 2004 as a result of the Florence Forum. See Volume I. 199 Case M.1673, paragraph 30; see earlier M.931, paragraph 26. 200 Case M.2947, paragraph 67. 201 As, also, no transfer charges were payable on transmission between control areas inside Austria. 202 Case M.1673, paragraphs 39-41. The Commission however took the charge into account in its competition assessment.

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1.2.1.3 Interconnection capacity 2.131

2.132

2.133

2.134

Adequate interconnection capacity is of key importance to the definition of wider than national geographic markets. Import capacity is constrained by the limited capacity of the interconnectors enabling the transmission of electricity between Member States. These limited capacities therefore act as a strong technical barrier to entry for foreign suppliers. – Significant interconnection capacity The absence of interconnections between two countries, or even between two areas within a country, normally lead to the finding of distinct markets. As the Commission stated in DONG/Elsam (March 2006): “as there is at present no direct interconnection between the two Danish price areas, Denmark East and Denmark West, it would seem inappropriate to define the relevant geographic market as all-Danish in scope”.203 This was again confirmed in EDF/Dalkia ( June 2014), where the Commission recalled it generally considers the market for generation and wholesale of electricity to have a national dimension, in particular due to the limited capacity and weakness of the interconnectors between neighbouring Member States.204 The mere existence of interconnection capacity between two countries is, in the Commission’s view, not sufficient to lead to the recognition of wider than national markets.205 To enable wider than national markets to develop, interconnectors should have enough capacity to allow substantial imports, capable of exercising a competitive pressure on the national producers.206 It has never precisely been stated what level of interconnection is needed in this respect. The analysis below however shows that 25% is enough but 13% is not. In Verbund/Energie Allianz ( June 2003), the finding that the interconnector capacity could allow for significant imports into Austria was vital to the recognition of a possibly wider than Austrian market for wholesale supply.207 The interconnector capacity represented about 25% of Austrian electricity consumption so that substantial imports were possible from Germany or Switzerland and Austria. 203 204 205 206 207

Case M.3868. Case M.7137, paragraph 35. Although this was suggested in one decision: M.2890, paragraphs 15 & 37. See below under Imports, at book paragraphs 2.168-2.174. Case M.2947, paragraph 65.

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However, in all other cases in which the issue was raised, the Commission concluded that inadequate interconnection capacity existed, providing strong evidence of the national scope of the market under consideration. The maximum technically available capacity from the Netherlands to Belgium, allowing a maximum 13% of imports, led, as such, to the conclusion that there was no common electricity market between Belgium and the Netherlands.208 In 2001, the import capacity being less than 10% of the installed generation capacity, the French market was deemed to be of national scope.209 The limited capacity between England and Wales and neighbouring countries, amounting to less than 6% of total consumption, led to the definition of a relevant geographic market for generation no wider than England and Wales.210 In Germany, the interconnection capacity of 9,5%, reduced by three times to take into account congestion in the distribution network, led the Commission to conclude the existence of a German market.211 The limited commercial interconnection capacity between Spain and neighbouring countries representing approximately 7% of the capacity needed at peak demand times,212 led to the recognition of a Spanish market. The interconnection capacity from Spain to Portugal, representing 7% to 13% of the capacity needed in Portugal at peak demand times, similarly led to the recognition of a Portuguese market.213 The existence of an Iberian market was therefore excluded because of the limited interconnections between Spain and Portugal.214

2.135

The possible evolution of interconnection capacity is sometimes taken into account. In one decision, the fact that a substantial increase in the capacity of the interconnectors between Belgium and the Netherlands was not planned in the short to medium term was highlighted. The Commission added that considerable time was necessarily involved in the decision-making process, the planning and the investment needed.215 In ENI/EDP/GDP (December 2004), the Commission outlined an in-depth analysis of the reasons for which it was highly unlikely that a truly Iberian market would be created in the near future despite Spain’s and Portugal’s intention to create a common electricity market.216

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208 209 210 211 212 213 214 215 216

Case M.1803, paragraph 22; see also M.3318, paragraph 24. Case M.1853, paragraph 22. Case M.1346, paragraph 18 and, identically, M.2209, paragraph 16. Case M.1673, paragraphs 22-27. Case M.3448, paragraph 21; the same statement was made in M.2684, paragraph 24, M.2434, paragraphs 24-26 and M.2620, paragraph 7. Case M.3440, paragraphs 81-82. See case M.2340, paragraph 10; in M.3440, paragraphs 81-82, the fact that the level of available interconnections between Spain and Portugal was reduced at times oh high demand was also taken into consideration. Case M.1803, paragraph 20. Case M.3440, paragraphs 94-186.

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2.137

2.138

In DONG/Elsam (March 2006), the Commission took into consideration the situation arising from the coming into operation, after 2010, of the Great Belt Interconnector cable, connecting the East Danish and West Danish wholesale areas. It considered however that “both the remote time-frame and the uncertainty as to how strong that integrating effect will actually be limit the weight that the Commission can give to those effects”. Similarly, in EDF/Segebel (November 2009), the Commission took into account the fact that interconnection capacity had not significantly increased since the GDF/Suez Decision and that such increase could not appear to be envisaged in the near future.217 The Commission considered the market for Belgian electricity wholesale market, including electricity trading, as national in scope.218 – Available capacity In most cases, the Commission refers to the usable technical capacities after deduction of the capacity that is not available for technical reasons such as the security of the system.219 The physically available technical capacity may be significantly lower than the total theoretical capacity. It was, for instance, considered that the interconnector capacity between France and its neighbouring countries amounting to approximately 20 to 25 GW, should be reduced to approximately 10 GW of usable capacities to take into account technical limitations.220 Most importantly, to be used, capacities must also be available and allocated. Free capacities in the interconnectors may sometime not be available because they are reserved through long-term contracts, often by incumbent companies. They are therefore not taken into consideration.221 Again this may be very significant: electricity imports into the Italian market were limited by the fact that about 50% of the interconnection capacity was booked under long term contracts by the Italian incumbent company ENEL.222

217 Case M.5549, paragraph 23. 218 Case M.5549, paragraph 38. 219 See case M.1853, paragraph 22 as regards France; M.1803, paragraph 22 and M.3318, paragraph 24 as regards Belgium; M.1673, paragraph 27 as regards Germany; and M.2947, paragraph 65 as regards Austria. See also the reference to available capacities in M.2684, paragraph 24; M.2434, paragraphs 24-26 and M.2620, paragraph 7. In M. 2947, paragraph 65, the Commission considered that the net transfer capacity – not the thermal transfer capacity – is relevant in practice because that calculation takes account of the weak points in the grid and therefore of the capacities in reality available on the interconnectors in order to ensure steady network operation in the event of the failure of a circuit or transformer. The Commission referred to data from UCTE Statistical Yearbook. 220 Case M.1853, paragraph 22. 221 Case M.1803, paragraphs 17-23 or M.1673, paragraph 27. On “contractual congestion”, see Volume I. 222 Case M.2792, paragraphs 29-31.

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The Commission may also take into account the fact that the spare capacity is not allocated, possibly due to ineffective capacity allocation mechanisms.223 –

2.139

Congestion

The existence of absence of congestion – or bottlenecks – in cross-border interconnectors has always been taken into account in determining whether interconnection capacity represents a barrier to entry.224 This is becoming increasingly central to the Commission’s analysis.225 The Sydkraft/Graninge decision (October 2003), for example, made congestion key to the analysis of the relevant geographic market.226 Because congestion had isolated Sweden from the rest of the Nordic area only for an insignificant period of time over the last years,227 and as a consequence prices were very rarely different in Sweden from the rest of the Nordic market, the wholesale electricity market was considered to be likely to be larger than Sweden. However, the Commission did not assess precisely what the capacity of the interconnectors were and stated that sufficient interconnection capacity existed for a competitive Nordic market to develop because the Nordic market, fully liberalised, was “connected through interconnectors, and that anyone connected to any part of a national network in Denmark, Finland, Norway and Sweden can in principle buy (or sell) electricity from (to) anyone else connected to the network”.228

2.140

This approach was confirmed in DONG/Elsam (March 2006). Even though interconnector capacities were relatively high between West Denmark and the other Nordic countries, accounting for about 67% of peak demand, in a very substantial fraction of the hours producers in West Denmark were not constrained by producers in the rest of the Nordic region as shown by the fact that congestion led Denmark West to constitute a separate price area at Nord Pool in 39% of the hours in 2005. For the Commission, this conclusively showed that the transaction could not entirely be assessed on the basis of a wider than Denmark market.229 The analysis of the competitive effects of the concentration needed to take into account “the possibility that, at least partly and possibly limited to some (congested) periods, the relevant framework for analysis is separate

2.142

223 224 225 226 227 228 229

In Spain: M.2434, paragraphs 24-26. E.g., in the past, among the Nordic countries: M.931, paragraph 26. See the above Introduction to “The relevant geographic market – Electricity” at book paragraphs 2.110-2.116. Case M.3268, paragraphs 25-27. In 2000, 5.5% of the time. In 2001, 0%, in 2002, 0.1% and 0% in January-September 2003. Case M.3268, paragraph 8. Case M. 3868, paragraphs 253 to 262.

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(a) East-Danish and (b) West Danish wholesale sub-markets”, while recognising “situations in which Nord Pool price zones are larger than individual East Danish or West Danish price zones” and even in which “all Nord Pool areas could, at times, be joined price areas”, or “any other combination linking East Denmark and/or West Denmark with one or more other Nord Pool price area”.

2.143

This tendency to evolve towards a distinction between peak hours and off peak hours was confirmed in RWE/Essent ( June 2009).230 The Commission considered that for the Dutch wholesale market, there could be two possible market definitions: either of national scope for all hours, or of national scope for peak hours and an area equal to Germany and the Netherlands for off-peak hours. As there is more capacity available on the interconnector with Germany during off-peak hours, imports from Germany exercise a significant competitive pressure on Dutch suppliers during those hours. In GDF Suez/International Power ( June 2011),231 the Commission took the same approach as in RWE/Essent and considered that the geographic scope for generation and wholesale of electricity can be left open with regards to the Netherlands.

2.144

In Italy, the fact that the market could be divided into different pricing zones which are very frequently isolated because of physical network limitations pointed towards the existence of regional markets.232 The existence of congestion preventing imports between Spain and Portugal during 25% of the year was also central in the Commission’s finding that no Iberian market existed in the ENI/EDP/GDP decision (December 2004).233

2.145

In E.ON/Mol (December 2004), the finding that the electricity interconnectors with Austria and Slovakia are almost all the time congested so that no additional imports are possible, was also central to the finding of a market Hungarian in scope. In addition, the Commission emphasised the fact that limited interconnection capacity with countries in the North of Hungary, where electricity production costs were lower, led to expensive auctions and prevented electricity prices between Hungary and its Northern neighbouring from converging as the auction prices were offsetting the electricity prices differences.234

230 231 232 233 234

Case M.5467, paragraphs. 26-32 and 61. Case M.5978, paragraph 34. Cases M.4368 and M.3729. Case M.3440, paragraphs 83-90. Case M.3696, paragraphs 262 to 264.

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Strong congestions from France to Belgium and Belgium to the Netherlands, preventing all capacity demand from being satisfied from 20% to 50% of the time, and from Germany to the Netherlands, were central to the finding of a Belgium market in GDF/Suez (November 2006) despite strong interconnections with neighbouring countries. The Commission emphasised the extreme difficulty of being a stable external supplier when interconnectors are congested even to a limited extend: congestions prevent an external supplier from committing on stable prices and constant supply. Balancing requirements for congested network were also deemed to create strong uncertainty as to export planning.

2.146

The fact that cross-border flows are still typically congested at all German borders with the exception of the interconnectors with Austria, led the Commission to conclude that Central West Europe region did not constitute a market despite a notable price convergence.235

2.147

Transportation is more important for importers than for local producers. Congestion within the internal electricity network of a Member State can therefore also make it difficult for importers to trade electricity within the country concerned. The limited capacity of the distribution networks was considered to be an element limiting import capacity into Germany;236 bottlenecks between the North and South of Austria were similarly considered as “ultimate” barriers to imports.237

2.148

– Overlap of import and export flows It can be argued that available import capacity is in reality much higher than the interconnectors’ technical capacity: the interconnectors can be freed up by simultaneous imports and exports of electricity, so that capacity equivalent to the balance of imports and exports is again made available (known as “netting” of flows). As a consequence, trade volume can be argued to exceed technical connection capacity.238

235 236 237 238

Case M.5467, paragraph 235. Case M.1673, paragraph 25. Case M.2947, paragraph 66. See Volume I.

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2.150

However, in practice this argument has not been accepted by the Commission in cases concerning Germany,239 Portugal240 and France.241 The mere fact that exports in the opposite direction to prevailing flow could in theory, free up additional trading capacity is irrelevant unless such flow actually occurs.

1.2.1.4 Critical size and local generation activities 2.151

In Verbund/Energie Allianz ( June 2003), the geographic markets for supply to large customers, small distributors and regional suppliers were deemed not to extend beyond Austria, although the Austrian electricity market was protected by neither technical nor regulatory barriers to entry.242 In addition to the structure of supply on the Austrian market and the actual flow of trade with neighbouring countries, the strong non-technical or regulatory barriers to entry consisting of established customer relationships and preferences and distribution costs were taken into account243 as factors indicating the existence of a national market.

2.152

Firstly, it was concluded that entry into the Austrian market with a view to long‑term supply to distributors and large customers is worthwhile only if a certain minimum number of customers can be secured, in particular because of the costs of establishing distribution arrangements which are needed for market entry. These costs were particularly high in Austria because of the fragmentation of distributors, the country being covered by more than 100 network operators. This also made market entry especially difficult for suppliers not possessing a detailed knowledge of the market. Secondly, the cost of balancing energy was considered to form a very strong barrier to entry: because it works on a smaller scale and does not have generation capacity in the control area concerned, a new entrant inevitably has a higher percentage requirement of balancing energy244 than an incumbent, involving a higher risk of increased costs. Thirdly, as a substantial proportion of small Austrian customers attached great importance to “clean” hydroelectric electricity, a new entrant would have to have a significant hydroelectric component in its electricity portfolio. This, again, required a critical size of operations in the country. Against this background, a relatively small increase in electricity prices for large Austrian customers, of around 5%, was 239 Case M.1673, paragraph 28. The predominant flows were going from France to Germany, and from Germany to the Netherlands. 240 Case M.2434, paragraphs 24-26. 241 Case M.1853, paragraph 23. 242 Case M.2947, paragraphs 55-97. 243 As well as a price level lower in Austria than in the neighbouring Member States, see below 2.1.5. 244 Balancing energy needs were defined as the offset between unexpected consumption surpluses and deficits. On balancing energy, see book paragraphs 4.158.

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deemed not to be enough to make the distribution and customer acquisition costs profitable in the short to medium term245 by a new entrant. The Commission again highlighted that a local presence was essential for all electricity retail activities, whether to small or large customers, for brand recognition, marketing, customer service, metering and billing in ENI/EDP/GDP decision (December 2004) and E.ON/Mol (December 2005).246

2.153

In GDF/Suez (November 2006), the Commission emphasised the extreme difficulty of being a stable external supplier when interconnectors are congested even to a limited extend, as it prevents committing on uninterrupted supply and stable prices, and balancing requirements create uncertainty as to export planning. The lack of liquid market also pointed towards the need of having a local generation presence to meet customers’ requirements on a stable basis.

2.154

1.2.2 Low prices In Verbund/Energie Allianz ( June 2003), the fact that the retail price level was lower in Austria than in the neighbouring Member States was decisive in the finding that the geographic market was limited to Austria.247 Electricity tariffs imposed on large customers in Austria were well below the German level, with a gap in prices to industrial customers of about 20% in 2001. Prices for household customers were even lower than in Germany, therefore preventing German suppliers from entering the Austrian market. A major factor explaining this price difference was the low average production costs of Austrian hydroelectric generators constituting a large proportion of Austrian electricity production.248 In an earlier decision, the fact that in the Netherlands the electricity price level was higher than in Germany, so that deliveries took place from Germany to the Netherlands, but not the other way around, was also taken as an indication that 245 In an early decision concerning Sweden, the Commission had also considered that a physical presence on the national market was required in order to achieve significant sales, case M.931, paragraph 26. 246 Cases M.3440 and M.3696 at paragraph 272. 247 Case M.2947, paragraphs 79-94. 248 The favourable production cost base of the largest Austrian electricity producer, Verbund, had been increased by the grant of compensation for stranded costs – in order to compensate for the higher costs of unprofitable power stations that were built in the expectation of continued monopoly rights. By decision of 25 July 2001 the Commission authorised aid of E 560 million for a number of run-of-river hydroelectric stations and one thermal station belonging to Verbund (state aid measure No N34/99, Austria, compensation of stranded costs). On state aid decisions on stranded costs, see book paragraph 4.168 under State Aid. The Commission also rejected the existence of predatory pricing policy from the Austrian companies as an explanation for the lower prices (case 2947, paragraphs 79-94).

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markets were national in scope.249 Surprisingly, the argument was never made as regards the French market, although the lower production cost base in France arising from nuclear energy is arguably one of the main entry barriers into France.

2.157

In many respects, however, such indications are more relevant as evidence of the existence of a separate geographic market rather than an entry barrier (see below, book paragraphs 2.176-2.182).

1.2.3 Switching behaviour and customer loyalty 2.158

2.159

2.160

Within the framework of market opening, customer loyalties/preferences can act as a strong barrier to entry for suppliers from other countries or from other regions within the same country. Where customers have a tendency to stick to their national or local historical supplier, effective market opening will always be slow. The analysis of customer behaviour was therefore key to the finding of the evolution from local to national markets in England and Wales. Switching patterns may be considered to be either a barrier to entry or a factor indicating whether markets should be widely or narrowly defined. In fact they can be both. The willingness of customers to switch, the existence of customer loyalty or unwillingness to switch due to fears of security of supply, or a regulatory system giving customers insufficient information to help them to take the step of switching supplier, can all be important entry barriers. The fact that few customers have in fact switched to foreign supplies, can be strong evidence that the market remains national in scope. However considered, it is submitted that in the future this factor/entry barrier may play an essential role in geographic market definition in the electricity sector. In EDF/London Electricity ( January 1999), the analysis of customer behaviour, and especially the switching rate, was central to the finding that electricity supply to medium sized customers250 was of no smaller geographic scope than England and Wales.251 For the UK regulatory authorities, the relevant geographic markets for supply to these medium sized customers was still, more than four years after market opening, limited to the individual regional distribution areas since the incumbent supplier at stake still had a market share of 58% of these customers in its distribution area. The UK authorities’ finding was reversed by the Commis249 Case M.1673, paragraph 28. 250 Customers with an annual demand between 100kW and 1MW, see book paragraphs 2.44-2.48. 251 Case M.1346, paragraphs 22-24.

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sion which, taking into account the dynamics of the market, relied on the fact that this stable high market share was hiding a competitive market marked by frequent changes of suppliers, with approximately 40% of medium-sized customers switching from the incumbent regional supplier each year. The stable market share was explained by the fact that these customers were being replaced by approximately the same number of customers, switching from other suppliers which the incumbent supplier attracted every year. This high switching rate suggested that brand loyalty, advertising costs and the difference in market shares between the competing suppliers did not prevent customers from switching, and therefore did not constitute significant barriers to entry. The Commission added that brand loyalty was unlikely in a commodity market such as electricity for this type of customers: medium sized customers were normally well aware of the possibility of changing suppliers and knew how to compare competing tariffs.252 Customer behaviour was also central in the evolution, in England & Wales, from the finding of regional markets for supply to small customers to the acceptance that this market was in the process of becoming national. In the months immediately following market opening to small customers, which was completed on April 1999, the small customers supply market was considered to be of regional scope as the vast majority of customers exhibited considerable inertia to switching supplier. In the wake of liberalisation, in EDF/London Electricity ( January 1999)253, the Commission considered that it was likely to take some time before a significant number of these customers changed their electricity supplier, as many small customers were found to be unlikely to be familiar with the process involved in changing supplier, or did not know how to compare the competing offers. A few months later, although a survey had shown that 89% of domestic customers were aware of their ability to switch supplier, the Commission questioned the existence of proper information of these customers, as the same survey showed that 72% of the customers could not name more than three suppliers. This lack of adequate information, together with the fact that no more than 5% of customers in the areas concerned had already changed supplier, suggested to the Commission that the geographic market for the supply to small customers was still limited to the regional distribution areas.254 In a second series of decisions, in December 2000 and later in 2002, the Commission accepted that, as a result of the increased customer switching rate, the geographic market for supply to small customers was in the process of becoming national.255 In 2000, approximately 252 253 254 255

In addition, the former incumbent operator was bidding annually to supply all medium size customers. Case M.1346, paragraph 25. Case M.1606, paragraph 19. Case M.2209, paragraphs 20-21 and M.2890, paragraph 35.

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1% of all small customers were switching electricity suppliers each month.256 In 2002, the overall rate of customers having switched suppliers was around 35 %.257

2.162

2.163

In Verbund/Energie Allianz ( June 2003),258 following market opening to small Austrian customers two years earlier in October 2001, the switching rate was again taken into account to determine whether the geographic scope of the market was national, or remained local along the traditional supply areas of each Austrian distributor. The market still had strong regional features as small customers’ switching rates were still low and they overwhelmingly obtained electricity from their original local distributor. The fact, however, that small customers did switch to other Austrian regional suppliers was taken as an element showing a trend towards the integration of the markets at a national level within Austria. As a consequence, the precise scope – local or national – of the market was left open. With respect to customer behaviour, reference was also made to the fact that, as a substantial proportion of small Austrian customers attached great importance to “clean” hydroelectric electricity; a new entrant had to develop a brand image in this regard.259 In DONG/Elsam (March 2006), the fact that the switching rates in the nonmetered customer area was low was taken as an indication that this market could still be regional in scope.260 Similarly, in Germany, overall low and regionally different customer switching rates across Germany was taken a strong element pointing to local electricity retail markets for small customers approximately corresponding to each DSO area in Germany.261

1.3 Relevant evidence 1.3.1 Dominant national companies 2.164

In line with market definition principles, a comparison of the market shares of the main players on a national market with their market shares in neighbouring countries or at European level is a strong indication of the extent to which market structure is specific to the country concerned. Leading companies only having high markets shares on their historical market imply that barriers to entry

256 257 258 259 260 261

Case M.2209, paragraphs 20-21. Case M.2890, paragraph 35. Case M.2947, paragraphs 95-96. Case M.2947, paragraph 73. See above book paragraphs 2.153-154. Case M.3868. Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467.

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are present and indicate that national geographic markets exist.262 For example, in Verbund/Energie Allianz ( June 2003), it was indicated that “ fundamental differences” as regards the market shares of the parties and their competitors, on the electricity supply markets in Austria, in the neighbouring countries, and in the EU, “ in itself indicates that in geographic terms the relevant markets are confined to Austria” .263 All the main electricity suppliers at EEA level or at German level had a market share below 5% in Austria, and none of the major Austrian electricity suppliers had a market share of 5% or more of any electricity supply market in a neighbouring Member State or at EC level. In other decisions, reference is simply made to the fact that the incumbent historic operator remains dominant in the country concerned whereas the penetration of strong players from neighbouring countries is limited.264 Similarly, at infra-national level, the fact that the historic local supplier remains largely dominant at local level is taken to be a strong indication that regional markets still exist within a Member State.265 In Germany for instance, there is over 800 municipal utilities – Stadtwerke – which control the electricity distribution network and still exert a significant influence on the electricity retail supply to small customers. The continuing dominance of these municipal utilities in their municipal area was taken a strong element pointing to local electricity retail markets for small customers approximately corresponding to each Stadtwerk area in Germany.266

2.165

1.3.2 Actual flow of trade The actual flow of trade, especially the levels of imports, is key in the finding of a wider than national market. Only a level of imports of enough significance to represent a competitive constraint on national producers can conclusively point towards the existence of a wider than national market.267 Transit flows, which 262 In fast evolving markets, this should however be put in context, see the General Introduction, at book paragraphs 2.105-2.119. 263 Case M.2947, paragraph 58. 264 Case M.3318, 23-24 as regard the Belgian market, see also the early decisions M.493, paragraph 25 and M.568, paragraph 18. 265 See, as regard the English and Welsh market: case M.2209, paragraph 20 (“the vast majority of customers were supplied by the incumbent regional operator”); or M.2890, paragraph 35 (“the incumbents still have high market shares in their historic region [& ] the average market shares were around 70%”). 266 Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467. 267 On “significant level of imports”, see case M.2947, paragraph 99; on “competitive constraints” see M.3318, paragraph 24. In fast evolving markets, this should however be put in context. Under the Commission’s Notice on Market Definition “the absence of trans-border purchases or trade flows (& ) does not necessarily mean that the market is at most national in scope. Still, barriers isolating the national market have to be identified before it is concluded that the relevant geographic market in such a case is national” (paragraph 50).

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cross a country and are delivered to others, should not normally be taken into account as they are not made available to the national market concerned.268

2.167

In the Commission’s practice, a proportion of less than 6% of imports normally strongly suggests that the market is not wider than national.269

2.168

A somewhat higher rate of imports of 14% to 15% can also lead to the same conclusion. For example, although the precise market definition was left open, it was considered that imports into the Netherlands limited to 14% of national demand pointed to the existence of a national Dutch market.270 In two decisions in 2001 and 2002, the trade flow from neighbouring countries representing 15% of the total electricity consumption in Italy (in 2000), led the Commission to conclude that the Italian market for electricity supply to eligible customers was of national dimension.271 In some decisions, reference is simply made to the very low volume of imports272 or very rare exports.273 In Verbund/ Energie Allianz ( June 2003), the Commission also took into consideration as evidence of very limited cross border trade the fact that foreign suppliers were very rarely asked to submit a bid in tenders made by Austrian customers, even more rarely responded, and had practically never secured contracts.274 The same reasoning was applied in Verbund/Energie Allianz at retail level.275 In Sydkraft/ Graninge (October 2003), the indication given by a market investigation that no or almost no end-users were supplied by suppliers outside of their country of residence led to the rejection of the parties’ submission that a Nordic end-user market existed276 at retail level. Finally, exports taking place only at certain times of the year, such as rainy seasons, do not seem to be accepted as valid indications of a wider than national market.277 In ENI/EDP/GDP (December 2004), the 268 Case M.1673, paragraph 22. 269 Less than 3% for Austria (M.2947, paragraphs 60-62) and France (M.1853, paragraphs 24-25), 4,3% for Spain (M.3448, paragraph 21), 5% for the Netherlands (M.1803, paragraphs 17-23) or 6% for Germany (M.1673, paragraph 22). The import ratio is not always calculated in the same way: it is sometimes compared with the group of customers concerned (level of imports for this group/consumption of this group), as in M.2947, paragraphs 60-62, or, sometimes, on a general basis, with eligible customers (M.1853, paragraph 24), or even general consumption (M.1673, paragraph 22 and M.3448, paragraph 21). 270 Case M.1659, paragraph 9. In another, old, case (M.931, paragraph 25), significant imports of 10% of the total electricity supply, were also not enough for the Commission to conclude at a wider than national Finnish market. However, the vast majority of imports were coming from Russia not from other Nordic countries. 271 Case M.2792, paragraphs 29-31 and earlier M.2532, paragraphs 34-36. 272 As regard Belgium, M.3318, paragraph 24. 273 As regard Spain, M.2434, paragraphs 24-26. 274 Case M.2947, paragraph 63. The market survey had shown that, out of 75 Austrian distributors, only one had been supplied by a foreign supplier. 275 Case M.2947, paragraphs 63-64. 276 Case M.3268, paragraph 81. 277 Case M.2434, paragraphs 24-26.

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level of imports from Spain accounting for 9% of the Portuguese total wholesale supply was an indication that markets of national scope existed. In DONG/Elsam (March 2006), the fact that the largest industrial companies sourced electricity from Danish electricity supply companies and that there was no direct entry by foreign supply companies led to the recognition of a no wider than Denmark market for metered customers.278

2.169

The fact that the volumes of energy that were subject to the market coupling put in place between Slovakia and the Czech Republic was relatively low as compared to the whole consumption in the Slovak Republic was taken as a strong element showing that this market was still national in scope.279

2.170

Only in one decision was cross-border trade considered of enough significance to hint towards a wider than national market. In Verbund/Energie Allianz ( June 2003), the fact that the Austrian regional distributors draw a significant proportion of their electricity supplies from non‑Austrian suppliers led to the recognition of the possible existence of a geographic market extending beyond Austria for supply to regional distributors.280

2.171

Export data may however be misleading when the country is a transit country. In E.ON/Mol (December 2005), the Commission noted that the real size of electricity transit through Hungary was difficult to estimate since there was no differentiation between export, import and transit. For the Commission, this meant that gross import figures and the interconnection capacities were not entirely relevant for the assessment of the geographic scope of the market.281 Similarly, in GDF/Suez (November 2006), the volume of electricity exported from France to Belgium and from Belgium to the Netherlands did not show that Belgium was part of a wider market as these volumes represented exports from France to the Netherlands transiting through Belgium.

2.172

278 Case M.3868, 270. 279 Case M. 5591, paragraph 11. 280 Case M.2947, paragraphs 99-100. The situation of the Austrian market is very specific in that two out of the three control zones, the western Länder of Vorarlberg and the Tyrol, technically belong to the German control block. All the other Länder together are the eastern control area, or “Austrian Power Grid” area, which is a separate control block. This last control area however accounts for, by far, the larger part of the country. 281 Case M.3696, paragraph 260.

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In both cases, despite strong cross border trade flow, the Commission concluded that markets were no wider than national. Congestions prevented any significant additional trade flow than electricity in transit.

2.173

Similarly, at local level, the fact that suppliers operate on a national scale is a strong element showing that local markets have been replaced by a national market.282 In DONG/Elsam (March 2006), the fact that customers both in the east and the west of Denmark regarded suppliers that historically originated from the other area as viable alternatives, and that these suppliers were selling in both areas, was an indication that the historic pre-liberalisation separation of intraDanish markets has lost its importance and of a transformation of the Danish end customer electricity regional markets into a national market.

1.3.3 Customer switching 2.174

As explained above, at book paragraphs 2.160-2.166, the level of customer switching (and the supplier to which customers switch to) is considered to be an important indication of the geographic scope of the market in question.

1.3.4 Price differences between neighbouring areas 2.175

In addition to being considered as an entry barrier in Member States where prices are significantly lower than in neighbouring countries,283 the existence of significant price differences between Member States, or within the same Member State, is often taken as an indication of different market structures leading to distinct national or local geographic markets.

2.176

In ENI/EDP/GDP (December 2004), the fact that Spanish and Portuguese prices were “poorly correlated and fluctuated a lot from each other” was central to the Commission’s conclusion that no Iberian market existed.284 Higher prices in Italy than in neighbouring countries, or the existence of significant price differences between Belgium, France (with lower prices) and the Netherlands (with higher prices), also contributed to the definition of no wider than national Italian285 and Belgian markets.286

282 See case M.2209, paragraphs 20-21 for England and Wales; and M.931, paragraph 27 for Finland. 283 See above, book paragraphs 2.157-2.159. 284 Case M.3440, paragraphs 91-93: prices were different from each other by more than 20 to 30% for 50 to 60% of the time. 285 Case M.2792, paragraphs 29-31 and earlier M.2532, paragraph 34-36. 286 Case M.3318, paragraph 24.

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The existence, in the past, of relatively significant price differences between Finland and the other Nordic countries also led, among other factors, to the recognition of a national Finish market.287

2.177

In E.ON/Mol (December 2005), the fact that the Hungarian electricity wholesale prices were lower than prices in Austria, Germany and Croatia but higher than in Slovakia, Romanian, Ukraine and Serbia was an important element in the finding of a market national in scope. Interestingly, the Commission noted that congestions at interconnectors led to expensive capacity auctions preventing electricity prices between Hungary and its Northern neighbouring to converge as the auction prices were offsetting the electricity prices differences.288 At infra-national level, despite the fact that several suppliers were competing in each English and Welsh region, it was not accepted that a national market for electricity at retail level necessarily existed. In addition to the incumbents still having high market shares in their historic region, this was because the prices differed on a regional basis for small and medium-sized customers.289 Conversely, it was accepted that no regional markets existed inside Finland as, inter alia, wholesale prices for electricity were homogeneous throughout the country.290 In this last decision, highlighting the effect of possible congestion on the homogeneity of prices, the Commission stated that homogeneous pricing was possible because the system of balancing could prevent bottlenecks in the transmission network, enabling therefore producers and wholesalers to sell throughout the country at the same price. In the same way, in Germany, the existence of different local pricing policy according to the DSO areas was taken a strong element pointing to local electricity retail markets for small customers.291

2.178

The existence of an electricity exchange normally leads to homogeneous prices in the area covered by the exchange.292 It is therefore, normally, a strong indication of the existence of a single geographic market encompassing the area it covers. In Sydkraft/Graninge (October 2003) for example, the impact of Elspot, the daily market for physical trade on Nord Pool, on the homogeneity of prices among

2.180

287 Case M.931, paragraph 26. 288 Case M.3696, paragraphs 263-264. 289 Case M.2890, paragraph 35. Even though the difference in prices was limited: according to calculations for an annual bill for standard rate electricity provided by Energywatch, an independent consumer watchdog, the price range in the Seeboard distribution area is for a low user GBP 107 to GBP 182, while in the Swalec distribution area it is GBP142 to GBP 219. For a medium user the range in the Yorkshire distribution area is GBP 196 to GBP 302, while in the Swalec area it is GBP 236 to GBP 317. 290 Case M.931, paragraph 27. 291 Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467. 292 On exchanges generally, see below at book paragraphs 2.194-2.204.

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Nordic countries was strongly taken into consideration.293 In principle, Elspot sets common prices for all the Nordic countries based on supply and demand from all the market players in the area. However, when congestion develops on the transmission network, several price areas can develop.294 As a consequence the Nordic region was one single price area 52% of the time in 2001, and 35% in 2002. The existence of different price areas parts of the time limits the number of suppliers able to supply electricity in a given area and thereby the competitive structure of the market. The Commission investigated the frequency and distribution of the different price areas. As the price in Sweden was identical to Finland and East Denmark more than 90% of the time,295 the Commission concluded that “Sweden has only constituted a separate geographic area during an insignificant period of time in each of the last years, (and therefore) the price correlation between Sweden and Finland and Sweden and Denmark seems to imply that the generation/wholesale market is likely to be larger than Sweden”. In DONG/Elsam (March 2006), the fact that Denmark West constituted a separate price area at Nord Pool in 39% of the hours in 2005 indicated that a Denmark West market existed at these moments.296

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The fact that price differences between the two countries continued to exist was taken as a strong element showing that despite the market coupling and common exchange put in place between Slovakia and the Czech Republic these markets were still national in scope.297

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The impact of national exchanges on the homogeneity of prices at national level can also be an indication that the market does not extend to other Member Sates: England and Wales were identified as a separate market for generation on the basis that the English and Welsh exchange, the Pool and later NETA, only applied to England and Wales and therefore identical prices could only be found in England and Wales and not, for example, Scotland.298

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On the other hand, it seems that price convergence between several Member States cannot as such lead to the recognition of a single market. In RWE / Essent ( June 2009),299 the market investigation showed a notable price convergence 293 Case M.3268, paragraphs 21-27. 294 These are: Sweden, Finland, Denmark West (DK1), Denmark East (DK2), South Norway (NO1) and Middle/North Norway (NO2). 295 As regard Finland, 84.2% of the time in 2000, 99.1% in 2001, 95.0% in 2002 and 70.2% in 2003; as regard East Denmark, 92.8% of the time in 2000, 94.6% in 2001, 90.7% in 2002 and 93.6% in 2003. 296 Case M. 3868, paragraphs 253 to 262. 297 Case M. 5591, paragraph 11. 298 Case M.1346, paragraph 18. See also M.2209, paragraph 16 and M.2679, paragraph 18. 299 Cases M.5467, paragraph 235.

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in the Central West Europe region. In view of remaining congestion at German borders, the Commission refused to conclude that Germany was part of a broader market at wholesale level.

1.3.5 Different regulatory frameworks The existence of different regulatory frameworks in neighbouring countries, or within a country, is a strong indication that markets remain national or even infra-national. The Austrian regulatory framework being different from the German one, as the first Electricity Directive had been implemented in significantly different ways in the two countries,300 led to the finding of two distinct national markets.301 Differences between the Spanish regulatory framework on the one hand, and the French and Portuguese regulatory frameworks on the other hand, led to the same conclusion.302 In two decisions concerning Italy, the fact that the regulatory framework was substantially different from the neighbouring Member States, or even unique as regards the specific regulatory framework for the generation of renewable electricity, also led the Commission to conclude that the Italian market for supply of electricity was national in scope.303 At local level, the different regulatory frameworks and the different stage of market opening between the three Belgian regions was taken to be an indication that infra-national markets could exist within Belgium.304 In E.ON/Mol (December 2005), the fact that the Hungarian regulatory framework was substantially different from those of neighbouring countries, was taken as a strong indication of the existence of a market of national scope. In particular, the legal framework for state aid for local coal and nuclear differed between 300 In particular as regard third party access to the network, with negotiated network access in Germany, and regulated “postage stamp tariff ” in Austria. 301 Case M.2947, paragraph 59. 302 Case M.2684, paragraph 24; see the same statement more recently but where the market definition was left open in M.3448, paragraph 21. 303 Case M.2792, paragraphs 29-31 and earlier M.2532, paragraphs 34-36. See also, generally, the older cases M.493, paragraph 25, highlighting the different European regulatory framework before EC harmonisation, and M.931, paragraph 26 mentioning, as regard Finland, differences in electricity taxation, environmental policies and different requirement concerning the levels of back-up capacity. 304 Cases M.3075-80, paragraph 20. Contrary to other Belgian regions, in the Brussels region, the historic supplier was under obligation neither to inform the clients becoming eligible of their right to switch to another supplier, nor to authorise its customer to terminate its contract with a one month notice. The indication was, however, not considered strong enough to conclude as to the existence of regional markets as similar structures of supply and demand among the three Belgian regions conclusively showed, for the Commission, that no infra-national existed. Ten months later, the same considerations however led the Commission to leave the market definition open as dominant positions existed on both regional or national market definitions (M.3318, paragraphs 26-28).

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countries, as well as environmental and other regulations affecting power generation. As a result the power generation mix of Hungary and its neighbouring country differed much, which had an impact on the homogeneity of electricity wholesale markets.305 In EDF/British Energy (December 2008), the Commission concluded that at retail level, the relevant market comprised the whole of Great Britain as this area is regulated by the same regulator and similar conditions of competition therefore apply.306

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The implementation of the second internal market Electricity Directive by the Member Sates as from July 2004 have strongly contributed to the harmonisation of regulatory framework in Europe. This will be strengthened by the transposition of the Third Package which is compulsory for Member States as from 3 March 2011.307 The Agency for the Cooperation of European Regulators (ACER) which is put into place under the Third Package should have a strong role in facilitating harmonisation of regulatory framework. It will however only apply as from 3 March 2011.308

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The chart below shows the different level of market opening and eligibility threshold among Member States as of the end of 2006 and 2007.309 Under EC law, market opening was to reach 100% in all Member States by July 2007.310

1.3.6 General market structure, regional exchanges and market coupling 2.190

The general structure of supply and demand has been used by the Commission to be an indication that the market is no wider, but also no smaller, than national. For example, one argument leading to the conclusion that Spain was not part of the same market as France and Portugal was the fact that the organisation of the wholesale market in Spain differed significantly from the electricity systems in those two neighbouring countries.311 305 Case M.3696, paragraph 266. 306 Cases M.5224, paragraph 88, and before Case M.4517. 307 Articles 50 (electricity directive), 54 (gas directive), 26 (electricity regulation), 32 (gas regulation) and 35 (Agency regulation). 308 Article 35 (Agency regulation). 309 Extract from the Technical Annex to the Communication from the Commission to the Council and the European Parliament of 11 March 2010 - Report on progress in creating the internal gas and electricity market, Table 1.1. Source: National Regulators. 310 Malta, Cyprus and Estonia however have been granted derogations from market opening (see Volume I, at Chapter 11). 311 Case M.2684, paragraph 24; see the same statement more recently but where the market definition was left

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In another case, the homogeneity of the market conditions in Belgium, and the fact that the structure of supply and demand was strongly different from neighbouring markets, constituted strong evidence that the market was not wider than national.312

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In the past, distinctions were also made between Member States with one unique supplier, such as France, from countries with regional suppliers, such as Germany; or countries with developing trading activities, such as the United Kingdom.313 Where a single national supplier exists, the market is more likely to be national than regional in scope. In another case, the fact that only Italian companies were active on both demand and supply sides led to the conclusion that the market for the generation of renewable electricity was limited to Italy.314 The fact that there is a different competitive landscape in the countries surrounding Germany led the Commission to conclude that Central West Europe region did not constitute a market despite a notable price convergence.315

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At local level, the existence of similar structures of supply and demand among the three Belgian regions was taken as conclusive evidence that no infra-national markets existed, despite the existence of different regulatory frameworks and levels of market opening among the Belgian regions. The fact that the structure of production and import capacities were planned and managed on a nationwide basis was highlighted by the Commission.316

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In Germany, the existence of local marketing strategies focusing on the territorial incumbent was taken a strong element pointing to local electricity retail markets for small customers.317

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Exchanges and market coupling

When considering whether different market structure between neighbouring Member States constitutes evidence of national geographic markets, probably the most important consideration is the existence of electricity exchanges or pools. open in M. 3448, paragraph 21. 312 The Belgian market was predominantly supplied by the historic Belgian incumbent company, see M.3318, paragraph 23; M.3075-80, paragraphs 19 and 21 and M.2857, paragraphs 15 and 17. 313 Case M.493, paragraph 25. 314 Case M.2792, paragraph 31 and earlier M.2532, paragraph 36. 315 Case M.5467, paragraph 235. 316 Cases M.3075-80, paragraphs 20-21 and M.2857, paragraphs 16-17. In a more recent case (M.3018, paragraphs 27-28), the same consideration was also taken as a strong indication that no regional markets could be defined, although the Commission left the market definition open. 317 Cases M.5512, paragraphs. 17 and 18, M.5496 and M.5467.

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Depending on their geographical scope, the existence of national exchanges and pooling arrangements constitutes a strong indication that a market is no wider or no smaller than national, or has a supra-national dimension.

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It was accepted as an indication that the Dutch market was not wider than national because it was governed by a pooling arrangement which did not apply to neighbouring countries.318 The wholesale trading arrangement called The Pool, which was in place in 1999 in England and Wales, was considered strong evidence, together with low interconnection capacities, of a geographic market limited to England & Wales, as the arrangement only covered this area.319 The fact that electricity was to be traded nationwide on the Frankfurt and Leipzig exchanges which were to be established in the near future was taken to be an indication that the German market would in the near future be national in scope.320

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The existence of a regional exchange covering several Member States is also a strong indication of a wider than national market. The existence of Nord Pool, the regional electricity market for the Nordic countries was key to the recognition of a possible geographic market encompassing the region.321 The existence of a regional exchange is however not in itself sufficient to determine the existence of a supra-national market: in the past, the restrictions still applying to cross-border trade of electricity between Nordic countries led the Commission to conclude, in 1998 and again in 2001, that the relevant geographic market was limited to Sweden and Norway, although the Nord Pool electricity market covering these countries had already been in place for several years.322 318 Case M.1659, paragraph 9. The low volume of electricity traded on the Dutch exchange APX (3,8% of the national production capacity) was also taken as a reason, it seems, for the recognition that the geographic market was limited to Holland in the subsequent decision 1803,19. 319 In 1999, in EDF/London Electricity (case M.1346, paragraph 18). This was confirmed in the following decision (M.2209, paragraph 16 EDF/Cottam Power Station) in which the Commission stated: “the electricity trading arrangements in England and Wales, (i.e. the Pool) were established via legislation which provides for the geographic market”. In a more recent decision, although leaving the market definition open, the Commission confirmed that the introduction of the New Electricity Trading Arrangement (NETA), on 2001, did not as such lead to a wider market as it only applies to England and Wales. For the Commission, the introduction of NETA did not affect the capacity of electricity to be traded between England and Wales and the neighbouring regions such as Scotland and France and that the trading arrangements would continue to differ between England and Wales and these regions (M.2679, paragraph 18). More recently, the parties still based their argument that the market for generation was confined to England and Wales, in addition to the limited interconnections capacities with Scotland, Northern Ireland and France, on the fact that NETA only applied to England and Wales (M.3007). 320 Case M.1673, paragraph 45. 321 Cases M.3268 and M.3868 at paragraph 253. 322 Cases M.1231, paragraphs 10-11 and M.2349, paragraph 12.

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Similarly, the market coupling put in place in 2009 between Slovakia and the Czech Republic did not lead to the recognition of a wider than Slovakian market as the liquidity of the Czech and Slovak energy exchanges was still low and trading volumes were not larger than interconnector capacity allocated through market coupling, and the volumes of energy that were subject to market coupling was relatively low as compared to the whole consumption in the Slovak Republic.323

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Markets in derivatives of electricity may also have a certain integrating effect by smoothing the risk of diverging wholesale prices. In Dong/Elsam (March 2006), the Commission however considered that, because they belong to a separate product market, financial derivatives of electricity cannot determine the geographic scope of the physical wholesale electricity market.324 In GDF/Suez (November 2006), the introduction of the common spot market and of market coupling between France, Belgium and the Netherlands did not change the Commission’s conclusion that the Belgium market was of national scope because it would not suppress congestions in particular at peak hours.325 This market coupling, still in 2009, did not lead to the recognition of a wider than national Dutch generation and wholesale market326. Similarly, in EDF/Segebel327 (November 2009), the Commission did not consider that market coupling would change the available interconnection capacity between France and Belgium.

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When an exchange is not yet in place, and there is no proof that it will definitively be in place in the future, it cannot be taken as an indication of the geographical scope of the market: the envisaged MIBEL market between Spain and Portugal cannot therefore not yet be taken as evidence showing the existence of an Iberian market.328

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323 324 325 326 327 328

Case M. 5591, paragraph 11. Case M.3868. Case M.4180, paragraph 727. Case M.5467, paragraphs. 26-32 and 61. Case M.5549, paragraph 31. Cases M.2684 and M.2434; see also M4685. Initially set to start on January 2003, the Iberian electricity market, MIBEL, was postponed on several occasions and only started in 2007.

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1.4 Case-by-case examination of Member States 2.203

In the following section each country329 is examined to determine the present position regarding the Commission’s approach to geographic market definition for electricity supply markets. It should be underlined that this examination is based on previous decisions and market development. The fact that markets are evolving quickly will need to be taken into account in using this section as an indication of the Commission’s likely approach in future cases.

1.4.1 Austria 2.204

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In Verbund/Energie Allianz ( June 2003),330 the Commission considered that Austrian electricity market is not protected by limited interconnection capacities preventing foreign suppliers from entering. With a total capacity equal to 25% of Austrian electricity consumption, the interconnections between Switzerland and Austria, and Germany and Austria had enough capacities for a wider market to develop. There was also no, or very little, regulatory barriers to entry, the Austrian market being fully opened to competition since October 2001. Within the supply market, a distinction was made between supply to large regional distributors on the one hand and supply to large customers, small distributors and regional suppliers on the other hand.331 Because of the strong interconnection capacities and the absence of regulatory barriers, it was accepted that a market of supply to large regional distributors may be wider than Austria although the issue was left open.332 It was however decided that the wholesale market of supply to large customers, small distributors and regional suppliers did not extend beyond Austria.333 This finding, which led to commitments being imposed on the parties to the concentration, was based on the structure of supply on the Austrian market, the actual flow of trade with neighbouring countries, and non-technical or regulatory barriers to entry. Both the structure and the legal framework of the Austrian electricity markets were “ fundamentally different from those of the neighbouring countries”. Electricity imports were de facto limited as regards supply to large customers and smaller distributors, foreign suppliers rarely responded to invita329 Romania and Bulgaria have joined the European Union at the beginning of 2007 but are not covered hereafter because of lack of relevant statistical data. 330 Case M.2947. 331 See the product market analysis on the wholesale market at book paragraphs 2.24-2.27. 332 See above at book paragraphs 2.153-2.154, 2.157 and 2.164. 333 Case M.2947, paragraphs 55-97.

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tions to tender from Austrian buyers and had practically never secured contracts with them. Finally, strong non-technical or regulatory barriers to entry existed, consisting of established customer relationships and preferences, distribution costs, and a price level lower in Austria than in the neighbouring Member States. At retail level, the Austrian supply market to small customers, which had been open to competition in October 2001, still had strong local and regional characteristics. In particular, the switching rates of customers were still low, so that a very large majority of small Austrian customers still obtained electricity from their original distributors. An existing trend towards a wider than regional market for small customers was however evidenced by the fact that switching to other regional suppliers, and in particular new suppliers, was taking place. In addition, small customers were forming supra‑regional purchasing pools. Whether the market was of national or regional scope was therefore left open.334

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1.4.2 Belgium In ECS/Sibelga (December 2003), it was concluded that the Belgian market for the supply of eligible clients was national.335 First, high barriers to entry, mainly due to the limited interconnector capacities, especially at the border with France, isolated the Belgian market. Reference was also made to the lack of cross-border contracts enabling Belgian customers to purchase electricity abroad, and to the fact that new market entrants into Belgium had to comply with cumbersome approval procedures imposed by both national and regional Belgian authorities. As a result, the volume of imports was extremely low. Secondly, the market structure was national in scope. The historic incumbent Belgian producer had a very strong position in Belgium, whereas strong players in neighbouring territories only had small market shares. In addition, a different pricing structure between Belgium and France, with lower tariffs, or the Netherlands, with higher tariffs, existed.

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This was confirmed in GDF/Suez (November 2006),336 where it was decided that despite strong interconnections and trade flow with France, the Netherlands and Germany, the Belgian market was of national scope. Strong congestions from France to Belgium and from Belgium to the Netherlands, preventing all capacity demand from being satisfied from 20% to 50% of the time, prevented stronger exports and showed that Belgium was a transit country for electricity generated

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334 Case M.2947, paragraphs 95-96. 335 Case M.3318, paragraphs 21-25, confirming the previous decisions M.3075-80, paragraph 19 and M.1803, paragraphs 17-23. 336 Case M.4180, from paragraph 696. See also M.3883 and M.3729.

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in France and supplied to the Netherlands. The higher price of electricity in the Netherlands prevented potential exports to Belgium. Congestion from Germany to the Netherlands prevented exports of German electricity to Belgium. Even the introduction of the common spot market between France, Belgium and the Netherlands, and the introduction of market coupling between these countries, did not change this situation as it would not prevent congestions in particular at peak hours. This analysis was confirmed more recently in October 2009.337 Also, in EDF/Segebel and GDF Suez/International Power, the Commission concluded that the Belgian electricity generation and wholesale market remained national in scope as there were no special circumstances that would require a revision of the market definition.338 In EDF/Dalkia, it was suggested by some respondents in the market investigation that a wider market, covering Belgium, the Netherlands, Luxembourg, France and Germany could exist, but the Commission explicitly defined the market as national in scope.339

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With respect to the existence of local markets within Belgium, in two cases the Commission considered that similar structures of supply and demand existed among the three Belgian regions. Furthermore, the fact that the structure of production and the import capacities were planned and managed on a national wide basis was considered to be a conclusive evidence that no infra-national market existed, despite different regulatory frameworks and levels of market opening among the regions.340 In GDF/Suez (November 2006),341 the Commission however concluded that regional markets existed for domestic customers based on the different timing of market opening between the three Belgian regions. This analysis was also confirmed more recently in October 2009.342

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The geographical scope of the electricity supply markets in Croatia is likely to be no wider than national. The Commission has confirmed that competition in the Croatian energy market is still very limited and that further market opening is required. In particular, Croatia has not yet fully liberalised its energy markets and should step up its efforts to deregulate wholesale and retail prices, as well as complete the unbundling process.343 While the cross-border transmission and 337 338 339 340 341 342 343

Case M.5519, paragraph 15. Cases M. 5549, paragraph 38 and M.5978, paragraph 71. Case M.7137, paragraphs 38-39. Cases M.3075-80, paragraphs 20-21 and M.2857, paragraphs 16-17. See also M. 3318 and M. 3883. Case M.4180, from paragraph 740. Case M.5519, paragraph 15. Commission Staff Working Document of 13 October 2014, Progress towards completing the Internal En-

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allocation of interconnection is progressing, it is unlikely to be sufficiently significant to warrant a deviation from the Commission’s standard approach of defining the relevant market as national in scope.

1.4.4 Cyprus With no interconnection capacities with the European continent, Cyprus is likely to be considered to be a separate national market.

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1.4.5 Czech Republic In a decision of July 2006, the Commission left the market definition open but suggested that the market was in any event not smaller than national.344

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1.4.6 Denmark In 2001, it was still being considered that the electricity markets in the Nordic countries could be seen as remaining essentially national in scope because of the restrictions still applying to cross-border trade.345

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The reasoning followed in the recent Sydkraft/Graninge decision (October 2003), seemed to imply that the Danish market was likely to have become larger than national.346

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In the recent Phase II decision Dong/Elsam (March 2006),347 relating to the merger of the Danish gas and electricity incumbents, the parties argued that the market for electricity wholesale was at least pan-Nordic as a result of the Nord Pool spot market covering wholesale of electricity in Denmark, Norway, Sweden, and Finland.

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Moreover, generally below 15%, the congestion of the interconnector between Sweden and East Denmark was not high and interconnector capacities are relatively high in East Denmark (74% of peak demand) and in West Denmark (67% of peak demand). The finding of Sydkraft/Graninge that a market encompassing Denmark East and Sweden existed was however not confirmed, the Commission concluded that the electricity wholesale market could be either East

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344 345 346 347

ergy Market Country Reports, p. 30. Case M.4238, paragraph 19; see also case M.3665. Case M.2349, paragraph 12. Case M.3268, paragraph 27, see book paragraphs 2.143 and 2.181. Case M.3868; see before case M.3867.

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Danish and West Danish respectively or wider.348 Arguably this was because interconnection congestion figures were substantially higher in 2004 and 2005, and, consequently, the Danish Competition Authority, in its decision on the Elsam/NESA merger in 2004, had defined the relevant geographic wholesale markets as Denmark East and Denmark West respectively, on the basis of significant price differences and congestion between these areas.

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To reject the existence of a wider than Danish market all the time, the Commission based itself on the fact that, in a very substantial fraction of the hours (39% in 2005), Denmark West constituted a separate price area at Nord Pool, and producers in West Denmark were therefore not constrained by producers in the rest of the Nordic region. Moreover, as there was no direct interconnection between the two Danish price areas, Denmark East and Denmark West, a Danish market could not exist. The Commission also considered that the geographic market for final metered customers was not broader than Denmark as the largest industrial companies also source electricity from Danish electricity supply companies, and there is no direct entry by foreign supply companies. As an example, Vattenfall, the largest Swedish supplier, was not currently active in Denmark as a retail supplier to industrial customers. The historic pre-liberalisation separation of regional Danish markets had however lost its importance, the market being of no smaller than national dimension. The Commission finally left open whether the market or markets for supply of electricity to non-metered customers (household customers and small business customers) was regional (i.e. coinciding with previous monopoly distribution areas) or national in scope.

1.4.7 England, Wales, Scotland349 2.221

In England and Wales, market opening took place in 1989 for customers consuming above 1MW, in 1994 for customers consuming above 100kW, and in 1999 for all customers. Because market opening took place at such an early stage, England and Wales are a good example of the influence over time of the process of liberalisation on geographic market definition. Because of the guidance it can provide as regards more recently liberalised countries, it is worth recalling the 348 Case M.3868, paragraphs 253-273. 349 England and Wales is referred to as a “national” market as historically its electricity sector was distinct from Scotland and Ireland. It is however neither a “nation” nor a Member State.

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evolution of market definition even if it is of only historical value with respect to the English and Welsh market. In EDF/London Electricity ( January 1999), it was concluded that the relevant geographic market for generation could be no wider than England and Wales.350 First, the wholesale trading arrangement, called the Pool, in which generators had to sell electricity, was limited to England and Wales. Secondly, the interconnection between England and Wales and neighbouring countries, such as Scotland and France, had a limited capacity representing less than 6% of total capacity.

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This position was not formally reversed for some time.351 A trend towards the recognition of a geographic market of wider scope could however be evidenced. Later, although confirming that the introduction of the New Electricity Trading Arrangement (NETA), in 2001, did not as such lead to a wider market as it only applies to England and Wales and does not affect the capacity for electricity to be traded between England and Wales and other regions, the Commission did not expressly conclude that the geographic scope of the market was limited to England and Wales and left the market definition open.352 This was followed by the EDF/Seeboard case ( July 2002), where the Commission indicated that the geographic dimension of the markets for generation and supply to large customers (i.e. customers with a demand exceeding 100 kW) could be broader on the basis that the network was connected to Scotland and France.353 It was again envisaged, in a decision of December 2002, that the geographic scope of the market for supply of electricity to large customers might be Great Britain.354 In EDF/British Energy (December 2008), the Commission concluded that at wholesale level, the relevant market comprised the whole of Great Britain (including England, Scotland and Wales but excluding Northern Ireland).355

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350 Case M.1346, paragraph 18. 351 See the same finding in case M.2209, paragraph 16, and before in M.1606, paragraph 16; see also JV.36, paragraph 30 where the Commission left the exact definition of the geographic market open. 352 Cases M.2679, paragraph 18; and M.2675, paragraph 18. 353 Case M.2890, paragraphs 15 & 37. The parties were claiming that the market was limited to England and Wales because of the geographic scope of NETA, and the capacity constraints with France, North Ireland and Scotland. 354 Case M.3007, paragraphs 24-25. 355 Cases M.5224, paragraph 22, and before Case M.4517.

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This was again confirmed in GDF Suez/International Power ( January 2011) where the Commission found that the markets for generation and wholesale of electricity as well as retail supply of electricity encompass England, Wales and Scotland.356

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In relation to the supply of electricity to large and medium-sized customers – with a demand exceeding 100kW – in EDF/London Electricity ( January 1999), it was accepted that the geographic scope of this market was no smaller than England and Wales.357 For the Commission, this was because these customers have been able to choose freely any of the public electricity supply companies operating in this area for over four years (eight years for those whose demand exceeds 1MW). With respect to medium-sized customers, the Commission considered, contrary to the UK regulatory authorities, that the fact that the historic incumbent company in the area concerned (London) still had 58% of the medium sized customers in its distribution area did not lead to the existence of a regional market, as these customers were switching from one supplier to another on a frequent basis.358 The Commission concluded that the conditions of competition in the London area were not substantially different from those elsewhere in England and Wales.359

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Until 1999, small customers – with a demand not exceeding 100kW – had to buy their electricity from the public electricity supply company responsible for supply in their geographic area. The geographic market was therefore limited to each of the twelve exclusive distribution areas covering England and Wales. In the wake of market opening to small customers, in EDF/London Electricity ( January 1999), it was concluded that the geographic markets for supply to smaller customers, immediately post-liberalisation, were still limited to each of the former twelve suppliers’ distribution area.360 This conclusion was reached despite the fact that the smallest customers had, or were to have shortly, the 356 Case M.5978, paragraphs 42-44. 357 Case M.1346, paragraphs 22-24; confirmed in M.2679, paragraph 24. 358 As stated by the Commission: “40% of LE’s customers with a demand of between 100kW and 1MW will transfer away from LE each year. They are replaced by approximately the same number of customers which LE attracts from other suppliers”. This showed that “ brand loyalty” (unlikely in any event in a commodity market such as electricity), advertising costs and the difference in market shares between the competing suppliers in the LE area do not appear to have deterred customers from switching and therefore are not significant barriers to entry. In addition, the incumbent supplier was bidding each year to supply customers and they, as medium size customers, were well aware of the possibility of changing suppliers and of how to compare competing tariffs. Finally a number of customers in this class currently supplied by LE is relatively small (c.5,000), suggesting that competing suppliers could seek their custom without major additional investment”. 359 Case M.1346, paragraphs 23-24. 360 Case M.1346, paragraph 25.

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possibility of freely selecting their supplier. This was because: (i) some of these customers still had no choice in their electricity suppliers, (ii) the price for the supply of the smallest customers was limited by a price cap at a maximum level fixed by the authorities and which was to remain in force for at least one year, and (iii) it would take some time before a significant number of these customers would change their electricity supplier, as many small customers were not familiar with the process involved in changing suppliers or did not know how to compare the competing offers. The Commission concluded that the ability of these customers to change supplier was not, at the time, sufficient in itself to constrain the prices charged by the regional supply companies. A few months after market opening to small customers had been completed, in EDF/South Western Electricity (May 1999), it was suggested that the geographic market for supply to small customers was likely to remain limited to the distribution areas since: (i) these smaller customers remained protected by price caps at least in the short term, (ii) there was no conclusive evidence showing that these customers were well informed about the identity of competitors, and (iii) no more than 5% of customers in the areas concerned had already changed supplier.361 In later decisions, in 2000 and 2002, in the years following market opening, the Commission, although leaving the issue open, accepted that the geographic market for supply to small customers was in the process of becoming national, as a number of suppliers were operating on a national scale and customer switching was increasing.362 Some regional characteristics however remained, such has price differences and high market shares of incumbent companies within their historic region. In EDF/British Energy (December 2008), the Commission concluded that at retail level, the relevant market comprised the whole of Great Britain (including England, Scotland and Wales but excluding Northern Ireland) as this area is regulated by the same regulator and similar conditions of competition therefore apply.363 This was again confirmed in GDF Suez/International Power ( January 2011) where the Commission found that the markets for generation and wholesale of electricity as well as retail supply of electricity encompass England, Wales and Scotland.364

361 Case M.1606, paragraph 19. The same reasoning was followed in JV.36, paragraph 34, where the market definition was left open. 362 In 2000 in case M.2209, paragraphs 20-21 and later in 2002 in M.2890, paragraph 35. The market definition was again left open later in December 2002 (M.3007). In 2000, approximately 1% of all small customers changed their electricity supplier each month (M.2209, paragraphs 20-21). In 2002, the overall rate of customers having switched suppliers was around 35 % (M.2890, paragraph 35). 363 Cases M.5224, paragraph 88, and before Case M.4517. 364 Case M.5978, paragraph 42.

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1.4.8 Estonia 2.227

Estonia, Latvia, and Lithuania are not connected to the UCTE system and no direct import or export of electricity therefore takes place between these three countries and the rest of the European Union. With interconnection capacities amounting to 66%, Estonia is however strongly interconnected with Lithuania and Latvia. It is therefore not certain whether it would be considered as a separate national market distinct from the two other Baltic countries. As Estonia benefits from a specific derogation enabling it to postpone the implementation of the Electricity Directive and full market opening until 2013, only 10% of the market was however opened at the end of 2004.

1.4.9 Finland 2.228

In IVO/Neste ( June 1998), the view was taken that the relevant geographic market was limited to Finland.365 This was because: (i) imports, although increasing, were still limited to about 10% of total electricity supply in Finland, (ii) there existed relatively significant price differences between Finland and the other Nordic countries, (iii) a cross-border transmission fee was charged by the grid companies, (iv) differences in electricity taxation, environmental policies and back-up capacity requirements existed between Finland and other Nordic countries, (v) interconnection capacity was limited, and (vi) there were bottlenecks in the transmission of electricity between the Nordic countries.366 If confirmed, the reasoning followed in the recent Sydkraft/Graninge decision (October 2003), however implies that, at wholesale level, the Finish market may be larger than national.367

2.229

As regards end customers, following the full liberalisation of the Nordic electricity sector, enabling a customer in any Nordic country to freely choose a supplier from another Nordic country, it was accepted that the market for supply to end users in Finland was at least of national scope if not wider. However, the indication given by the market investigation that no or almost no end-users are supplied by companies outside of their country of residence and that suppliers 365 Case M.931, paragraphs 24-26. 366 Considering Finland’s advanced stage of full liberalisation, as early as 1998, the Commission excluded the existence of wholesale markets of narrower scope than Finland, since wholesale supply of electricity could as yet freely be done on a national basis with no technical constraints arising from congestion issues and as a result the wholesale prices for electricity was homogeneous throughout the country (931,27: ‘even if a producer’s generation capacity is limited to one part of Finland, he can sell throughout the country, since a system of balancing is used to deal with potential bottle-necks in the transmission network’). This was confirmed in M.3268, paragraphs 80-82. 367 Case M.3268, paragraph 27. See below book paragraphs 2.279-2.280.

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have to have a balancing agreement with a balance provider in the customer’s country, led the Commission to reject the parties’ submission that a Nordic enduser market existed, leaving however the final definition of a national or wider than national market open.368

1.4.10 France In EDF/EnBW (February 2001), it was concluded that the geographic market for the supply of eligible customers of electricity was limited to France.369 This finding was based on two main arguments: the limited interconnection capacity between France and neighbouring countries, and the only recent and still limited imports to France. Interconnection capacities represented less than 10%, this situation being, according to the Commission’s finding, unable to evolve in the short term. Imports had only begun recently and the proportion of imports only represented 3% of the electricity consumption of eligible customers. In EDF/EDFT (August 2003), although leaving open the precise geographic scope of the market, the Commission confirmed that the market was likely to be national for the same two reasons, adding that significant price variations between countries and different national regulatory frameworks existed.370 In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity markets in France is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.371 In GDF/Suez (November 2006), it was decided that Belgium was not part of the French market despite important exports from France because of the congestion level.372 More recently, in EDF/Dalkia the scope of the market was again confined to France, due to the limited capacity of interconnectors between neighbouring Member States. Although some respondents in the market investigation indicated a possible market covering France, the Benelux and Germany, the Commission explicitly limited the geographical scope to France.373 368 Case M.3268, paragraphs 80-82. 369 Case M.1853, paragraphs 21-25. The Commission had reached the same conclusion in an earlier Phase I decision M.1557, paragraph 33. 370 Case M.3210, paragraph 11. Reference was made to the import ratio on the overall consumption in France (less than 1%), not on the consumption of eligible consumers as in EDF/ENBW. 371 Case M.4110, paragraphs 20-21. 372 Case M.4180, at paragraph 253. See under Belgium at book paragraphs 2.211-2.213. 373 Case M.7137, paragraphs 38-39.

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1.4.11 Germany 2.233

In VEBA/VIAG ( June 2000), it was excluded that supply of electricity at wholesale level was no wider than Germany in scope.374 As a consequence of the limited interconnection capacities with neighbouring countries only small quantities of electricity could be imported. In addition, interconnector capacities were reserved to a considerable extent to long-term contracts and additional costs were incurred for imports and the use of interconnectors. In a later decision, in E.ON/Fortum ( June 2003), the precise market definition was left open. Reference was however made to the fact that the process of market opening under the EC directives, and the development of exchanges, had not eliminated regulatory barriers to entry; imports of electricity generally remaining of a modest dimension in the EU.375

2.234

In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Germany is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.376 In GDF/Suez (November 2006), the Commission held that congestions from Germany to the Netherlands prevented exports of German electricity to Belgium (see under Belgium). That the wholesale German market was no wider than national was confirmed in more recent decisions377. In particular in RWE/Essent ( June 2009), the Commission based itself on the fact that cross-border flows are still typically congested at all German borders with the exception of the interconnectors with Austria, and there is a different competitive landscape in the countries surrounding Germany. The market investigation has however showed a notable price convergence in the Central West Europe region.378

2.235

At infra-national level, it was accepted in VEBA/VIAG that regional markets no longer exist within Germany at wholesale level and for large customers. The Commission considered that the German wholesale market for the supply of electricity, although still showing strong signs of being regional, was going to develop into a national market in the foreseeable future, and could therefore al-

374 Case M.1673, paragraphs 22-31. The analysis was fully confirmed by the Commission in a subsequent case one year later (M.2349, paragraph 13). 375 Case M.3173, paragraphs 9-10. 376 Case M.4110, paragraphs 20-21. 377 Cases M.5512, paragraph 15; M.5496; M.5467; and M.6540, paragraph 24. 378 Case M.5467, paragraph 235.

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ready be deemed to be national in scope.379 This conclusion was reached despite the fact that: (i) the activity of energy suppliers was still largely limited to their own historic supply areas, (ii) two trading zones existed within Germany leading to the payment of a transmission charge (“T-component”) which arguably was making it difficult for independent electricity traders to operate nationally, (iii) the accounting procedures for balancing energy also made it more difficult for market participants to operate nationally, and (iv) the establishment of the Frankfurt and Leipzig exchanges, on which electricity was to be physically traded nationwide, was not yet functioning. For the Commission as “the initial basic requirements for a national market (were) satisfied”, it was already not accurate to refer to the old regional supply areas as separate geographic markets or even to two trading zones within Germany. On the basis of other decisions, it seems unlikely that the Commission will be so forward-looking when examining whether or how quickly national markets will evolve into regional or European ones. That the wholesale German market (including supply to large customers) was now no smaller than national in scope was confirmed in more recent decisions380. As regards the market for the supply of electricity to small customers in Germany, the Commission recognised in previous decisions381 that competition in Germany is progressively expanding and that this could likely lead to a broadening of the geographic scope of the market for the retail supply of electricity to small customers in the future. It considered however in these recent decisions that there still are specific factors pointing towards a market that is narrower than national in scope, such as (i) the continuing dominance of the municipal utilities (the over 800 Stadtwerke which control the electricity distribution network and still exert a significant influence on the electricity retail supply to small customers) in their municipal area, (ii) overall low and regionally different customer switching rates across Germany, (iii) local marketing strategies focusing on the territorial incumbent, and (iv) different local pricing policy according to the DSO areas. The Commission therefore concluded that there are still strong indications pointing to local electricity retail markets for small customers approximately corresponding to each DSO area in Germany. The Commission considered a similar approach in Dong/KomStrom382 (September 2009) although it left the market definition open.

379 380 381 382

Case M.1673, paragraphs 32-45. The decision was confirmed in case M.2349, paragraph 13. Cases M.5512, paragraph 15, M.5496 and M.5467. See also COMP/39.388. Cases M.5512, paragraphs 17 and 18, M.5496 and M.5467. Case M.5604, paragraphs 8 and 9.

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1.4.12 Greece 2.237

In a decision of August 2008, the Commission considered that the Greek was no wider than national in scope. It also stated that there may be potential smaller markets because as a distinction could be made between the interconnected system (i.e. mainland Greece and interconnected islands) and the non-interconnected system (non-interconnected islands). The precise market definition was left open.383

1.4.13 Hungary 2.238

Due to its central position in Eastern Europe, Hungary is highly interconnected with its neighbouring countries, notably Austria, Slovakia, Ukraine, Romania, Serbia and Croatia (amounting to 38% in 2003). Electricity imports represent a significant share of the national consumption (18% in 2003). The Hungarian market could therefore arguably be considered to be wider than national in scope.

2.239

In the Verbund/Energie Allianz decision ( June 2003), it was however decided that the Hungarian market was not integrated with Austria, because the two markets were not sufficiently integrated in technical and commercial terms. In its Phase II decision E.ON/MOL (December 2005), relating to the acquisition of the Hungarian incumbent company, the Commission made an in depth assessment of the relevance of a geographic market wider than Hungary for electricity wholesale. It concluded that the relevant product market was national for the following reasons.384 Import figures and the interconnection capacities are not entirely relevant for the assessment of the geographic scope of the market. First, Hungary is a transit country and exported quantities amounted to around 40% of imported quantities in 2003. Secondly, the electricity interconnectors with Austria and Slovakia were almost all the time congested. As a result, the influence of imports on the electricity wholesale prices in Hungary could only be limited.

2.240

2.241

2.242

Further, under the Hungarian regulatory framework, electricity traders should set up a Hungarian trading company and obtain a Hungarian trading license to be active on the Hungarian market, and the Hungarian regulatory framework 383 Case M.5249, see also case COMP/38.700. 384 Case M.3696, paragraphs 256-271.

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and market opening rules still remained substantially different from those of neighbouring countries. The Commission, however did not exclude that, in the future, the market for the wholesale supply of electricity to traders in Hungary could acquire a broader geographic dimension.

2.243

The Commission also found that the Hungarian retail supply of electricity to end users was of national scope.385

2.244

1.4.14 Ireland No decisions have so far been adopted in relation to the Irish supply market. With interconnection capacities amounting to about 6% and the historic Irish incumbent holding a 85% market share and not being present in neighbouring Member States, Ireland is likely to be considered to be a separate national market.

2.245

1.4.15 Italy In two decisions in 2001 and 2002, the Italian market for supply of electricity to eligible customers was deemed to be national in scope.386 Interconnection capacities were limited by the fact that about half of available capacity was booked under long term contracts by the Italian incumbent company ENEL. Trade flows with neighbouring countries were also limited, with imports representing 15% of the total electricity consumption in Italy in 2000. In addition, the regulatory framework as well as prices on the Italian market were substantially different (higher) from neighbouring Member States.

2.246

In two further decisions, in 2005 and 2006, the Commission noted that the frequency of splitting of the Italian wholesale market into different pricing zones pointed towards the existence of four distinct zonal markets very frequently isolated because of physical network limitations (North zone, Macro-South zone (covering the zones of Centre North, Centre South and South), Macro-Sicily (covering the geographical zones of Sicily and Calabria) and Sardinia)387 but ultimately left open the exact definition of the geographic market.388

2.247

385 Case M.3696, paragraphs, 272-278. 386 Cases M.2532, paragraphs 34-36 and M.2792, paragraphs 29-31. 387 Sardinia was almost always isolated, the North was isolated 26% of the time, Sicily was isolated 41% of the time and Calabria often isolated from both the South and Sicily. 388 Cases M.4368 and M.3729.

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2.248

In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Italy is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.389

2.249

The specific Italian system for the generation of renewable energy, constituting a separate product market, was also considered to be national in scope as the specific regulated system only existed in Italy, and only companies located within Italy were active.

1.4.16 Latvia 2.250

Estonia, Latvia, and Lithuania are not connected to the UCTE system and no direct import or export of electricity therefore takes place between these three countries and the rest of the European Union. With interconnection capacities amounting to 100%, Latvia is however fully interconnected with Estonia and Lithuania. It is therefore not certain that it would be considered as a separate national market distinct from the two other Baltic countries. At present, however, given the very strong position of the Latvian electricity company at national level and low switching, at least at present the market is likely to be considered to be national in scope.

1.4.17 Lithuania 2.251

As Estonia and Latvia, Lithuania is not connected to the UCTE system, and no direct import or export of electricity therefore takes place between these three countries and the rest of the European Union. With interconnection capacities amounting to 50%, Lithuania is however strongly interconnected with Estonia and Latvia. At present, however, given the very strong position of the Lithuanian electricity companies at national level and low switching, at least at present the market is likely to be considered to be national in scope.

1.4.18 Luxembourg 2.252

No decisions have so far been adopted in relation to Luxembourg. With interconnection capacities amounting to about 90%, Luxembourg is unlikely to be considered to be a separate national market. 389 Case M.4110, paragraphs 20-21. See also more recently cases M.4672 and M.4368

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1.4.19 Malta With no interconnection capacities with the European continent, Malta is likely to be considered to be a separate national market.

2.253

1.4.20 The Netherlands In Electrabel/EPON (February 2000), the Commission came to the conclusion that the generation and supply markets in the Netherlands were no wider than national in scope.390 The import capacity into the Netherlands was limited to some 14% of the total national demand because of limited interconnection capacities. This limited capacity was fully used and a major proportion was booked under long terms contracts. In addition, regulatory constraints were considered to be important. As a result, importers accounted for less than 5% of the national Dutch market.391

2.254

In GDF/Suez (November 2006), it was decided that, despite strong interconnections and trade with the Netherlands, the Belgium market was of national scope. Congestions of the interconnectors from Belgium to the Netherlands by electricity generated in France prevented stronger exports. Higher price of electricity in the Netherlands prevented potential exports to Belgium. Congestions from Germany to the Netherlands also prevented exports of German electricity to Belgium.392

2.255

That the Netherlands electricity markets were probably national in scope was confirmed in October 2009.393 In RWE/Essent ( June 2009),394 however, the Commission considered that for the wholesale market, there could be two possible definitions for the geographic market: either of national scope for all hours, or of national scope for peak hours and an area equal to Germany and the Netherlands for off-peak hours. This was because during off-peak hours imports from Germany exercise a significant competitive pressure on Dutch suppliers because during those hours there is more capacity available on the interconnector with Germany. The argument was also made by respondents of the market testing that wholesale spot prices in the Netherlands and Belgium are the same for a

2.256

390 Case M.1803, paragraphs 17-23. 391 In an earlier case (M.1659, paragraph 9), the Commission had also invoked the fact that the Dutch market was governed by a pooling arrangement (the APX market) which geographic scope was limited to the Netherlands, but left the definition of the market open. 392 Case M.4180. 393 Case M.5519, paragraph 16. See before case M.5467, paragraphs 26-32 and 61. 394 Case M.5467, paragraphs 26-32 and 61.

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considerable percentage of the time and that Belgium is a likely candidate for a common generation and wholesale market with the Netherlands. The parties had also submitted that in view of existing trilateral market coupling between the Netherlands, Belgium and France and the fact that by the end of 2009 market coupling will extend to Germany and Luxembourg, there are indications that the geographic scope of the generation and wholesale market will become wider than national.

2.257

In GDF Suez/International Power ( June 2011)395, the Commission took the same approach as in RWE/Essent. While indicating that the geographical scope is either national for all hours, or national for peak hours and covering the Netherlands and Germany for off-peak hours, the Commission ultimately left this open. No mention was made of a possible move to a wide than national market covering the Benelux and Germany.

1.4.21 Norway396 2.258

As already mentioned, the Commission was still considering in 2001 whether the electricity markets in the Nordic countries could be seen to be essentially national in scope because of the restrictions still applying to cross-border trade.397 In the Sydkraft/Graninge decision (October 2003), it was however suggested that a Nordic market comprising Norway, Sweden, Denmark and Finland could exist, as electricity markets were fully liberalised in all these countries and connected through interconnectors, enabling anyone connected to any part of a national network in any of these countries to buy electricity from anyone else connected to the network.

1.4.22 Poland 2.259

With interconnection capacities amounting to only about 10%, Poland is currently likely to be considered to be a separate national market. In the EON/ Endesa decision (April 2006), the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Poland is likely to be not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States.398 395 396 397 398

Case M.5978, paragraph 34. Norway is not an EU Member State but is part of the European Economic Area (EEA). Case M.2349, paragraph 12. Case M.4110, paragraphs 20-21.

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In KGHM/Tauron Wytwarzanie ( July 2012), the parties also emphasised that all customers in Poland could purchase electricity from a number of suppliers active in the country. At the same time, the Polish electricity network was not sufficiently connected to the network of neighbouring Member States as to enable a wider geographic network and the Commission therefore considered the market as national in scope.399 The retail market is generally considered to be national in scope, in line with the Commission’s decisional practice, as well as that of the Polish competition authority.400

2.260

1.4.23 Portugal In a decision adopted in March 2001, the electricity supply market in Portugal was considered to be no larger than national, in particular because of the limited interconnection capacities limiting imports and exports of electricity between Spain and Portugal.401 The existence of an Iberian electricity market was clearly excluded. More recent decisions concerning Spain show that this finding has not been modified, despite the agreement concluded by Spain and Portugal, in November 2001, calling for the creation of an Iberian electricity market through the progressive convergence of the electrical systems of the two countries.402 The Portuguese electricity market was subject on 9 December 2004 to the first merger control prohibition decision in the energy sector, relating to the planned joint acquisition of the ex-incumbent gas company GDP by the ex-incumbent electric company EDP and the Italian company ENI. The Commission confirmed that the Portuguese electricity market was no wider than national in scope, and in particular, that it was highly unlikely that it will become Iberian in scope in the near future, despite the new agreement on the creation of an Iberian market reached by Spain and Portugal.

2.261

This was again confirmed in 2011, in GDF Suez/International Power where the Commission considered the market for generation and wholesale of electricity in Portugal as national in scope.403

2.262

399 400 401 402 403

Case M.5979, paragraph21. Case M.5979, paragraph31, referring to M.1673, M.1731, M.2947, M.3268, and M.5467. Case M.2340, paragraph 10. Case M.2684, paragraph 25. See under Spain at book paragraphs 2.277-2.278. Case M.5978, paragraph 23.

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1.4.24 Romania 2.263

The Romanian retail supply market is deemed to be national in scope as a result of the liberalisation process.404

2.264

In Romanian Power Exchange,405 the Commission limited the scope of its investigation to practices in the wholesale market in Romania, i.e. the organised framework for the trading of electricity and related services to which the electricity producers, the transmission and system operator, the distribution operators, the electricity market operator and wholesale customers participate, was examined.

1.4.25 Slovakia 2.265

The high interconnection capacity of 37% would suggest that a wider than national market could be or is, in the future, likely to exist. The fact that the leading Slovakian supplier has market shares of around 75% at national level would however strongly indicate that the market structure currently remains national in scope.

2.266

In a decision, the parties submitted that due to the convergence of the different national legislation, which followed the EU accession, and to the high level of interconnection, the geographic scope of the wholesale market should include the Central European countries, Poland, Hungary, Czech Republic and Slovakia. The Commission however considered that some evidences also points towards national markets and left the question open.406

2.267

In a decision of November 2009407, the Commission concluded that the Slovakian market was national in scope. The market test had however indicated that because in 2009 a market coupling was put in place between Slovakia and the Czech Republic, the market could have become wider than national.

2.268

The Commission however considered that market coupling does not in itself mean that markets should be considered wider than national. Three strong indications pointed towards the existence of a no wider than national market.

404 405 406 407

Case M.4841. Case AT.39984, paragraph 31. Case M.3665, paragraph 14. Case M. 5591, paragraph 11.

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First, the liquidity of the Czech and Slovak energy exchanges was still low and trading volumes were not larger than interconnector capacity allocated through market coupling.

2.269

Secondly, the volumes of energy that were subject to market coupling was relatively low as compared to the whole consumption in the Slovak Republic.

2.270

Thirdly, the price differences between the two countries continued to exist.

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1.4.26 Slovenia Slovenia has high interconnection capacities, amounting to about 68%, especially with Austria. In the Verbund/Energie Allianz decision ( June 2003), it was however decided that the Slovenian market was not integrated with Austria, because the two markets were not sufficiently integrated in technical and commercial terms. However, as these issues are dealt with, one may expect the market to widen in the coming years.

2.272

1.4.27 Spain In several decisions, including two phase II investigations, in 2002 and 2001, it was concluded that the supply market in Spain was national in scope.408 Imports to Spain were constrained by the limited interconnection capacity available between Spain and its neighbouring countries France, Portugal and Morocco, representing about 6.6% of the capacity needed at peak demand times. In addition, both the regulatory framework and the structure of supply at wholesale level differed from those of neighbouring countries such as France and Portugal. Finally imports of electricity to Spain were limited.409 The existence of an Iberian electricity market was in particular clearly excluded, even following the agreement concluded by Spain and Portugal in November 2001 for the creation of an Iberian electricity market through the progressive convergence of the electrical systems of the two countries. It was considered that, despite the conclusion of the agreement, the emergence of a truly Iberian market was still going to be prevented, in the coming years, by the limited interconnection capacity available between Spain and Portugal, and was still dependent “on the progressive implementation of a number of successive steps, that include not only technical 408 Cases M.2684, paragraphs 23-26 and M.2434, paragraphs 24-26. See also M.2353; M.2340, paragraph 10 and M.2620, paragraph 7. 409 See Cases M.2434, paragraphs 24-26 and M.2620, paragraph 7. The statement is not made in the more recent M.2684.

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measures on the electrical grids and interconnectors but also the elimination of regulatory and administrative barriers and the harmonisation of the functioning and management methods of the systems’ operators”.410 The Commission’s analysis proved to be right as, initially set to start on January 2003, the Iberian electricity market, MIBEL, was postponed on several occasions and only started in 2007. In ENI/EDP/GDP (December 2004), it was confirmed that no Iberian market existed or was likely to exist in the near future.411

2.274

In the EON/Endesa decision of April 2006, the Commission, although leaving the market definition open, stated that, based on the market investigation, the electricity market in Spain is likely to be still not wider than national in scope, pointing to lack of available interconnection capacity and price differences between Member States412. This analysis was still confirmed in July 2007.413

1.4.28 Sweden 2.275

The Swedish electricity market, including production and supply, was fully liberalised in January 1996. The Nordic exchange market, Nord Pool, and in particular Elspot, the daily market allowing for physical trade of electricity between countries, was also extended to Sweden in 1996. Despite this early market opening the restrictions still applying to cross-border trade of electricity between Nordic countries led the Commission to conclude in two cases, in 1998 and 2001, that the relevant geographic market was limited to Sweden.414 More generally, all electricity markets in the Nordic countries were still considered as remaining essentially national in scope in 2001.415 This finding has now probably been reversed following the abolition of cross-border transmission charges and the suppression of back-up capacity obligations. The Commission concluded in Sydkraft/Graninge (October 2003) that, at wholesale level, the market was likely to be larger than Sweden, although formally leaving the market definition open.416

410 Case M.2684, paragraph 25. 411 See above Portugal at book paragraph 2.265. The precise market definition as regard Spain was left opened in the recent case M.3448, paragraph 21 decision of September 2004. 412 Case M.4110, paragraphs 20-21. This was confirmed in the more recent case M.5171. 413 Case M.4685. 414 Case M.1231, paragraphs 10-11 and M.2349, paragraph 12. 415 Case M.2349, paragraph 12. 416 Case M.3268, paragraph 27. The precise market definition was also left open in the first decision following the abolishment of cross-border transmission charges M.2659, paragraphs 9-11.

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Also in Sydkraft/Graninge, it was accepted that the market for supply to end users in Sweden is at least national in scope if not wider. However, the indication given by the market investigation that no or almost no end-users purchase from suppliers outside of their country of residence, and that suppliers have to have a balancing agreement with a balance provider in the customer’s country led the Commission to reject the parties’ submission that a Nordic end-user market existed at retail level, leaving the definition of a national or wider than national market open.417

2.

2.276

Trading

The precise geographic market definition of the electricity trading market was until recently always left open by the Commission. However, it has been traditionally accepted that the geographic scope of a market for trading in energy products, including electricity, could be wider than national.418 In two more recent decisions it was, however, stated that probably no Community-wide market for energy or electricity trading at least as yet existed.419

2.277

The existence of an EC or even worldwide trading market was often put forward by the companies in merger proceedings, arguing that the essence of trading is to take advantage of differences in prices among different Member States,420 and that it is possible to intervene on any existing exchanges from a unique market.421 In EDF/Louis Dreyfus (September 1999), although accepting that the ongoing market opening plays in favour of the internationalisation of energy trading which has a natural international dimension, it was considered that the existence of a Community-wide market for the trading of electricity was contradicted by the fact that energy trading was strongly dependent on: (i) transport capacities which were generally limited in Europe because of low available interconnection capacities, and (ii) the existence of standard, or at least similar, trading contracts and trading systems. However, in Europe, certain countries have exchanges, others have pools with a single buyer and others do not have an organised system for trading.422 The different trading structure of the Benelux

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417 Case M.3268, paragraphs 80-82. 418 The statement was first made in case M.1557, paragraphs 24-28; see also M.2701, paragraph 8; JV.36, paragraph 35; and JV.28, paragraph 21. 419 Cases M.3210, paragraph 13 and M.1557, paragraphs 24-28. Also see Case AT.39984, where only the Romanian market was assessed. 420 Cases M.3210, paragraph 13 and M.1557, paragraphs 24-28. 421 Case M.1557, paragraphs 24-28. 422 Case M.1557, paragraphs 25-27. The Commission did not provide any indications of its reasoning in another decision M.3210, paragraph 13 concluding identically.

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countries, and especially the different stage of liberalisation and the fact that the Dutch exchange was limited to the Netherlands, was also taken into consideration, in 1999 and 2000, to reject the existence of a Benelux market for physical trade.423 It should be noted that in some decisions concerning physical trading in liberalised markets, trading activities are treated under supply not trade.424

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In GDF/Suez (November 2006), the Commission formally took position and concluded that the Belgium trade market was of national scope, despite the introduction of Belpex, a common spot market between France, Belgium and the Netherlands, and of market coupling between these countries, as it would not suppress congestions in particular at peak hours.425

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As regards financial trading, the existence of supra-national markets has been recognised. Arguably, the scope of financial energy trade could be global as the use of financial instruments by no means requires a local presence. In the Sydkraft/Graninge decision (October 2003), concerning the Nordic financial market Eltermin, which is part of the Nordic spot market Nord Pool, the market investigations showed that the geographic market should not be narrower than the Nord Pool area, i.e. the Nordic countries, the precise market definition however being left open.426 In an earlier decision, in 1999, it was accepted that financial trading in electricity derivatives, at Eltermin, and soon at the Dutch APX exchange, was likely to be wider than national, as no physical settlement or local presence was required.427 The Commission added that “financial trading of electricity derivatives varies little from financial trading in derivatives based in any other commodities”, an analogy could therefore be drawn with the geographic scope of the market for trading in financial derivatives in general, for which indications had shown in earlier decisions that the market was international in scope.428

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In the Dong/Elsam decision (March 2006), the Commission accepted the arguments of the parties that a market for financial derivatives of electricity encompassing the Nord Pool area existed, because trading take place on Nord Pool’s Eltermin. The Commission however made a reservation for special financial

423 JV.28, paragraph 21; and M.1803, paragraph 24 as regard the Dutch exchange. 424 E.g. as regard the activities on the Nordpool market and the recognition of a probable Nordic Market, see M.3268 above at book paragraph 2.202. 425 Case M.4180, paragraph 727. 426 Case M.3268, paragraph 67. 427 JV.28, paragraphs 22-24. 428 Case M.1172.

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product which hedges against the risk of area prices (e.g. Denmark East or Denmark West being different from the Nord Pool system price). The relevant market for these products was deemed to be of East Danish and West Danish dimension respectively, as companies trading in these products were mainly the wholesale suppliers and customers in these price areas.429

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In more recent cases, the Commission admitted that financial electricity trading “ has a potentially EEA geographic scope” without reaching definitive conclusions.430

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3. Facilitating Electricity Trading In 2011, the Commission examined the previously undefined market for the facilitation of wholesale electricity trading.431 The notifying parties had argued that the geographical scope of any relevant market would coincide with that of the market for generation and wholesale supply of electricity, given that electricity trading is inextricably linked to physical availability, production and delivery of contracted electricity to the grid. In that regard, the notifying parties claimed that the market for facilitating electricity trading should be national in scope.432 The Commission recalled that electricity trading involves contracts which specify the network to which the electricity needs to be delivered. In that regard, from a demand-side point of view, contracts for the delivery to different networks can only be substitutable to the extent that they are traded on networks that form part of the same wholesale electricity market. As the latter has been defined as national in scope, the market for electricity trading is also likely to be national in scope. This is further confirmed by the fact that the possibility of supply-side substitutability is low. The Commission’s market investigation showed that entry in different geographical areas is difficult and requires overcoming significant regulatory, organisational and economic barriers. The Commission therefore concluded that there were no grounds to consider a widerthan-national market.433

429 430 431 432 433

Case M.3868, paragraph 268. Case M.5467, paragraph 53; see also cases M.4110 and M.4517. Case M.5911. Case M.5911, paragraph 41. Case M.5911, paragraphs 42-43.

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4.

Transmission and distribution

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Several recent decisions have confirmed that, in principle, transport activities (transmission and distribution) in the electricity sector are natural monopolies in the areas covered, subject to regulated access and control of the network by regulatory authorities.434 In light of this natural monopoly, the geographical scope of the electricity transmission market is at least confined to each transmission operator’s network.435 Thus, in principle, no competition concerns can normally arise from a merger in this sector, in particular from the merging of two networks as no overlaps can occur from the addition of networks.436

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In E.ON/Mol (December 2005) for instance, the Commission stated that as in Hungary, the transmission grid was owned and operated by one company, the electricity transmission market was national in scope.437 In a similar way, at regional level, within the framework of electricity distribution in England and Wales, the Commission has always considered the geographical scope of the electricity distribution markets to be regional, as it was determined by the geographical scope of the licenses under which the companies operate.438 In E.ON/Mol (December 2005), as the six Hungarian electricity distribution grids were owned and operated by the six regional distribution companies, the electricity distribution market was deemed to be sub-national in scope, each of the distribution grid regions constituting a distinct relevant geographic market.439

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434 Case M.5911, paragraph 39. 435 Cases M.3440, paragraph 75; M.5467, paragraph 181; and M.5911, paragraph 45. 436 Cases M.3440, paragraph 75; M.3268, paragraph 75; M.2947, paragraph 27 and M.2340, paragraph 9. This last consideration is relevant as regard merger control, not issues of unilateral abuse of dominant position under Article 82 EC. 437 Case M.3696 at paragraph 253. 438 Case M.1346, paragraph 20; confirmed in JV.36, paragraph 32; M.2679, paragraph 19; M.2675, paragraph 19; M.2890, paragraph 18; M.3306, paragraph 12; M.1949, paragraph 18 and M.2586, paragraph 11. When the electricity industry in England and Wales was privatised, twelve regional electricity companies were established, each inheriting the low-tension distribution network in its defined geographic area. This remained the situation after market opening, so that each local distributor retained sole ownership of its distribution network, access being made available on a fair and non-discriminatory basis. The Commission considered that no possible substitution between networks was possible as, although access to these networks was available to any other electricity supplier selling electricity to customers located in the area covered by a given local distribution network, electricity suppliers wishing to supply electricity to any particular customer have no choice as to who distributes the electricity they supply, and there is no alternative methods by which electricity can be delivered to end-users. In one decision concerning the acquisition of control on two neighbouring areas, the Commission however examined whether the connections between the two areas were sufficient to enable the combined entity to operate as a single system in a wider geographic area; the conclusion was negative (M.2586, paragraph 12). 439 Case M.3696 at paragraph 254, more recently Cases M.4922, M.4685 and M.4841.

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A possible exception may be when a vertically integrated undertaking in one Member State, owning generation, transmission, distribution and sales facilities, purchases a network business in a neighbouring country. See in this respect Part 3 at book paragraph 3.236. This does not, however, change the likely relevant geographic market definition with respect to network assets.

2.288

In three decisions,440 the existence of a separate market relating only to the transmission of electricity involving a cross-border flow was considered. The Commission indicated that the geographic scope of such activity would in principle be limited to the transport of electricity on the respective interconnector line. This is because it is in principle possible for market participants to substitute certain interconnectors when booking interconnector capacity by using others. This would however normally lead to an increase in the number of interconnectors that are necessary to complete the booking path. The Commission concluded that to date, there was no single interconnector which could constitute a direct substitute for another.

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5.

Balancing

In Verbund/Energie Allianz ( June 2003), in relation to the Austrian market, it was stated that, provided the provision of balancing energy was to be considered as a relevant product market,441 the relevant geographic market should be confined to each specific control area concerned.442 As Austria is divided into several control areas, the relevant market was therefore to be limited to the eastern control area, for which Verbund was the responsible control area manager. The Commission based its finding on the fact that, under European transmission grid rules, balancing energy could only be provided in Austria inside each control area. In particular, the minute reserve component in balancing energy, which was considered as a decisive cost component, could not be transmitted over control area borders. This conclusion was reached despite ongoing negotiations on opening up the eastern control area to Germany as the situation was unlikely to change in the short term.

440 Cases M.5467, paragraph 182 to 184; M.4922 and M.5154. 441 See under Product Market at book paragraphs 2.89-2.94. 442 Case M. 2947, paragraph 102.

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In the Sydkraft/Graninge decision (October 2003), concerning the Nordic electricity market, the existence of a balancing market covering all the Nordic countries was suggested by the Commission.443 As all the regulating power sectors of the Nordic countries had been combined in 2002, bids for regulating power in all the countries were available to all Nordic transmission system operators in a common information system.444 Furthermore, the transmission system operators in Norway and Sweden take common decisions to maintain the frequency when the grid is congested. Finally, there was considerable flow of regulating power between the Nordic countries, especially from Norway, accounting for around 50% of the total regulating power market in the Nordic area. In the Dong/Elsam decision (March 2006), concerning Denmark, the Commission however concluded as to the existence of a balancing markets limited to each of the two Danish areas, as the provision of balancing services are dependent on immediate and reliable availability within a certain price area, and the existence of congestion of interconnectors impeded cross-border trade in these services in a considerable number of hours. The market investigation also showed that balancing services traditionally have been sourced from within each price area. The Commission added that “the likelihood of the cooperation between the Nordic TSOs actually leading to a wider geographic market in the foreseeable future is at the very least questionable”.445

2.291

In the ENI/EDP/GDP decision (December 2004), it was stated that the provision balancing services on a competitive basis are even more vulnerable to congestion and dependent on a harmonised market than wholesale markets. The market for balancing services cannot therefore be of wider than national scope if the wholesale market is national.446

2.292

In the E.ON/MOL decision (December 2005), the statement was made that the geographic scope of the market for balancing power was necessarily of no wider than national in scope, as electricity used for system balancing needs to be produced in the country and controlled by the national TSO in accordance with the UCTE regulation (as import and nominations were done for the next day and it is not possible to re-nominate them during the day). In GDF/Suez, the Commission also concluded that for technical reasons, electricity supplied to the balancing market had to be produced in Belgium which therefore con-

443 444 445 446

Case M.3268, paragraphs 52-54. The precise market definition was however left open. NOIS (Nordic Operational Information System). Case M.3868, paragraphs 263-266. Case M.3440, paragraph 178.

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stituted the relevant market.447 In Elia/IFM/50Hertz 448 (May 2010), the Commission left open the geographic market which was considered to be at most national in scope for balancing power but recalled that this cannot be substituted by imported electricity from outside the balancing area. In GDF Suez/International Power ( January 2011), with regard to Great Britain (i.e., England, Wales and Scotland, except the Northern Islands), the Commission referred to GDF/Suez and established that the provision of balancing power takes place on a national market.449 In EDF/Dalkia ( June 2014), with regard to the French market, the Commission also concluded that the market was national in scope, and could possibly even be limited to a certain region or to the region falling under the competent network managers’ regulation scope.450

6.

2.293

Network management and operation and networks services

It has been suggested by the parties in two decisions concerning the UK market that the relevant geographic market for utility network asset management and operation encompassed at least England, Wales and Scotland, since the same conditions of competition applied throughout this area, and would possibly in the future be of wider scope so as to cover the territory of the European Union as the markets develop and the regulatory regimes across Europe converge. The market definition was however left open.451

2.294

In two decisions concerning the UK regarding connection services, it was suggested that the market was in the process of becoming national.452 In the past, regional distribution companies held monopoly positions in their own region so that only local markets could be identified. The market for the supply of new connections, however, was in transition. It had only recently been opened up to competition and it seemed likely that in the future it was to become subject to competition on a national basis.

2.295

In a decision concerning the UK, the geographic scope of both meter operation and meter reading markets was deemed to cover the whole of Great Britain. This was because, for meter operations, the market conditions were homogene-

2.296

447 448 449 450 451 452

Case M.4180, paragraph 733. Case M.5827, paragraph 22. Case M.5978, paragraph 58. Case M.7137, paragraph 41. JV.36, paragraph 29 and M.2679, paragraph 20. Cases M.2679, paragraph 21 and M.2586, paragraph 14.

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2.297

ous and, as regards meter reading, the skills, technology and resources required were identical.453 In another decision, concerning Austria, where a market for “the installation and distribution of devices that are used for the distribution of electricity” was identified, probably including meter operation, the market was considered to be at least of national scope.454 All of these product markets concern the delivery of technical services. Whilst local specification requirements for these services may differ some-what between Member States, these differences are likely to be limited, surmountable and diminishing. If a significant price difference were to exist for these services between Member States, it is unlikely that the difference in technical terms would be so great that the supplier in the low price area would not have an interest in making the necessary investments to enter the higher price market. It is therefore submitted that for these services, the relevant geographic market can rapidly be expected to become wider than national in scope, if it is not already EU wide.

453 Case M.2890, paragraph 27; the issue was left open in the previous decisions M.1949, paragraph 19 and M.2679, paragraph 22. 454 Case M.2513, paragraph 15.

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CHAPTER 4 The relevant product market – Gas 1.

Introduction

In its most recent decisional practice,455 the Commission consistently considers that gas markets can be segmented as follows: i) the production and exploration for natural gas, ii) gas wholesale supply, iii) gas transmission (via high pressure systems), iv) gas distribution (via low pressure systems), v) gas storage, vi) gas trading, vii) gas supply to end customers and viii) the market for infrastructure operations for gas imports.

2.298

Within the gas sector an essential distinction should be made between upstream and downstream activities.456 The upstream gas sector involves four types of commercial activities: (i) exploration, the finding of new reserves, (ii) the development of those reserves (gas platforms, upstream pipelines or terminals (iii) the production and sales upstream from transmission level, the commercial exploitation of those reserves, including the sale of liquefied natural gas (LNG) and (iv) the offshore transportation and processing.

2.299

It is submitted that separate markets exist for (i) the exploration, and (ii) the production and sale of gas.457 It is only recently, in its Centrica case of August

2.300

455 See the reference to this segmentation most recently in 2009 in cases M.5649, para 11, M.5602, para 12, M. 5467, para 100, M.5220, para 13. M.3440 ENI/EDP/GDP, M.3294 EXXONMOBIL/BEB, M.3293 Shell/BEB, M.4180 Gaz de France/ Suez, M.3868 DONG/Elsam/Energi E2. 456 See cases M.1383; M.3080-3075, paragraph 13 and M. 3318, paragraph 14. In M.6984, EPH/Stredoslovenska Energetika, the Commission confirmed the distinction between the upstream and downstream wholesale supply of gas. 457 See cases M.1383, paragraphs 15-17; M.3318, paragraph 14; M.3293, paragraph 11 and M.3294, paragraph 11; also M.3052; M.3086, paragraph 8; M.1673; M.2822 and M.3288, paragraph 9. In previous, older, cases (M.88 and M.1573, paragraphs 9-12), the existence of relevant product markets for exploration, production

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2009 that this was expressly recognised by the Commission.458 The Commission added that no distinction is to be made between the exploration for oil and exploration for natural gas as the contents of underground reservoirs cannot be known at the stage of the exploration.459 On the contrary, as gas and crude oil have different applications and are subject to varying pricing behaviour as well as cost restraints, the Commission concludes that separate product markets exist for the upstream production of crude oil and for the upstream production of natural gas.460 In the Centrica case the Commission also recognised the existence of a market for offshore transportation and processing of natural gas.461 Sale of LNG also constitutes a distinct market.462 In M.6477 BP/Chevron/ENI/Sonango/Total/JV, the Commission confirmed there was a separate market for LNG (wholesale) supplies. In case M.4545 Statoil/Hydro, the Commission found that in countries where import infrastructure for LNG is present (re-gasification terminals, underground gas storage facilities, and international pipelines), LBG provides a direct competitive constraint to gas imported via pipelines.

2.301

The following sections relate to downstream markets. On these markets, gas should be considered as a product market distinct from electricity or other energy sources, as substitutability is very imperfect both from the demand and the supply side point of view.463

458 459

460 461 462 463

and marketing of firstly crude oil and secondly natural gas, was accepted. In the recent case M.3410, paragraph 13 of October 2004, the Commission referred to separate markets for exploration and production; these markets were, however, not concerned by the decision. See recently, the development on upstream trading in Case M.3696, E.ON/Mol, at paragraphs 101-102 and 131-133. Case M.5585, para 8. Case M.5585, para 8, see also case M.1532, para 13-15. Previously, in Exxon / Mobil (1383,16), it was already considered unjustified to make a distinction between exploration for oil and exploration for natural gas for the same reason that “the possible contents of the underground are not known at the time of exploration”. Cases M.5585, para 10 and M.1532, para 14. Cases M.5585, para 12 and M.1532, para 41. The Commission indicated that although the owners of natural gas fields require both transport and processing to be able to market their gas, “clearly pipelines and processing facilities fulfil different functions”. See e.g. case M.1573, paragraph 11. In cases M.493, paragraphs 21-24 and M.568, paragraph 17, referring to the fact that natural gas is used for both domestic applications, such as heating, cooking and hot water, and industrial application, such as production of heat, and, increasingly, the generation of electricity, it was accepted that substitutes existed for each of these usages: for domestic applications, essentially electricity and fuel (the later only for the production of heat and hot water), and for industrial applications, essentially fuel and gasoil, it was considered that this substitutability remained very imperfect because of direct and indirect cost differences. As regard electricity, the Commission stated that it is necessarily more expensive than gas as it is produced from another source of energy, and it is therefore utilized only when the characteristics of heat and the technical process require it. In addition, the Commission referred to structural rigidity to switch for the consumers arising from the fact that each type of energy requires different choices of equipment according to the source

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Within downstream gas markets, distinctions should be made, horizontally, between high calorific value and low calorific value gas, and, vertically, between markets relating to supply, transport and storage, and trading.464

2.

High and low calorific value gas

Originally discovered in the Netherlands’ Groningen gas field, low calorific value (LCV) gas has a lower energy value than high calorific value (HCV) gas as it contains more inert nitrogen.465 Several Commission decisions therefore sought to distinguish, within an overall natural gas market, submarkets for HCV and LCV gas.466 The distinction can only arise in countries that have dual production or supply: mainly the Netherlands and Northwest Germany, part of Belgium and the northern part of France.467 Despite their different calorific value, it has never been contested that HCV and LCV gas could have the same usage from the demand side. For the supply side, however, because of their different specifications, HCV and LCV gas necessarily use different transmission and distribution networks, as well as different underground storage facilities. Burners used by final consumers cannot also use either for LCV and HCV gas without adaptation.468

2.302

In the Exxon/Mobil decision (September 1999),469 an in depth analysis of the substitutability of LCV gas by HCV gas in relation to the German gas supply market was carried out. It was concluded that a relative price increase of LCV gas of between 5 to 10% would be unprofitable as LCV gas consumers in the relevant German area could switch to HCV gas. Therefore, LCV gas did not constitute a separate product market. The following elements were taken into

2.303

464 465 466 467 468 469

of energy chosen. Finally, from a supply-side point of view, the Commission considered that every source of energy presents some different requirements as far as production, storage and transport are concerned, which requires specific and important investments. See also the recognition of electricity as a distinct product market, at book paragraph 2.14. See e.g. recently cases M.3410, paragraph 13; M.3318, paragraph 14; M.3080-3075, paragraph 13; or earlier M.493, paragraph 29. The Commission often refers to the fact that each of these activities involves “specific technical knowledge and different infrastructures”. LCV gas is defined in Commission s decisions as having a Wobbe Index of up to 13 kWh/m³. Contrary to LCV gas coming from the Netherlands, HCV gas is supplied in Europe by the UK, Norway, Algeria and Russia. Cases M.1573, paragraph 10; M.1383, paragraphs 112-133; M.3075 to M.3080, paragraphs 14-15; M.3318, paragraphs 15-18; M.3297, paragraphs 12 and 22 and M.3410, paragraphs 16 and 22. For Belgium, the provinces of Antwerp and Limburg. For France, the administrative regions of Nord-Pas de Calais and Picardie. See case M.1383, paragraph 114. Case M.1383, paragraphs 112-133.

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account. First, it would be economically feasible for transmission and storage companies to switch to HCV gas. As regards storage, the conversion to HCV gas was more difficult than for the transport network, but could be made faster and more economically by blending gas, i.e. by adding LCV gas to HCV gas, to obtain a HCV gas of lower calorific value but within the HCV gas range, or vice versa. Secondly, most industrial customers and power generators could also switch from LCV gas to HCV gas as switching costs were low compared to their annual gas bill.470 In the same way, it was considered to be economically feasible for households to switch from LCV to HCV, as the costs involved could be absorbed by the suppliers within two to four years. Thirdly, alternative HCV gas supplies were available in the relevant area by a competitor: both large customers and retailers had therefore de facto the possibility to switch their demand to HCV gas. Finally, for the Commission, sooner or later the LCV gas chain had to be converted into HCV gas (given that LCV gas reserves were likely to dry up in the forthcoming decades), and a price increase of LCV gas was only likely to speed up this conversion.

2.304

The finding that LCV gas could be substituted for HCV gas was strongly put into doubt by subsequent decisions, even in those cases concerning markets where both HCV and LCV gas is available. In two decisions concerning Belgium,471 although leaving the precise market definition open, the Commission concluded from its market survey that HCV and LCV gas were likely to be part of two distinct product markets as (i) the market conditions were significantly different for the two types of gas, in particular as the spot market and the hub only covered HCV gas, (ii) the possibilities of converting LCV into HCV gas were very limited, and (iii) contrary to the Commission’s finding in Exxon/ Mobil, it would not be economically viable for competitors to built a HCV gas network or to convert equipment. A HCV gas network could therefore not rapidly replace the LCV network.

2.305

This distinction between HCV and LCV gas was confirmed for the Belgian and French markets in GDF/Suez (November 2006).472 The market survey clearly showed that the qualities of the two gas types could not be substituted; highlighting the fact that for certain manufacturing process in the chemical industry only HCV gas could be used. According to a study by the Belgian energy regulator, the cost of converting equipment was prohibitive both on the supply and 470 In particular, it was accepted that “ it would be economically feasible for an important industrial consumer or power generator to have a new specifically dedicated pipeline built linking the customer to a nearby (up to 50 km at most) HCV high-pressure pipeline” (paragraph 121). 471 Cases M.3075 to M.3080, paragraphs 14-15 and M.3318, paragraphs 15-18. 472 Case M.4180, paragraphs 64 to 69 for Belgium and 344 to 345 for France.

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the demand side. Moreover, clients connected to the distribution network are dependent on the network operator decision to switch to another gas. It is unclear that Exxon/Mobil can be reconciled with GDF/Suez. One difference could be that alternative supply of LCV or HCV gas was more easily available in Germany than in France or Belgium. Other elements of the Commission’s reasoning, such as the cost of converting equipment however, are not necessarily convincing.

2.306

In the RWE/Essent decision of June 2009 concerning the German natural gas market, the Commission departed from its analysis in Exxon/Mobil and established a distinction between LCV and HCV gas at both the wholesale and retail supply levels.473 The Commission rejected RWE’s argumentation that substitution was made easy by the existence in Germany of five quality converter stations. On the contrary, the majority of the respondents to the Commission’s market study were of the view that the characteristics, storage and delivery of HCV and LCV gas are different. While it is technically possible to switch from LCV to HCV gas, this process is considered by market players to be expensive, relatively time-consuming, and difficult since conversion facilities are booked on a market where the liquidity of LCV gas is low.

2.307

Nevertheless, in M.6910 Gazprom/Wintershall/Target Companies, the Commission found that in Germany, while some factors limited the interchangeability of HCV gas and LCV gas, and that there were also indications of the presence of some technical constraints that could limit interchangeability, and while leaving open the question as to whether they form a single product market, the Commission pointed out that the two types of gas are likely to be part of the same product market by 2016 given that:

2.308

–

technical gas conversion was already occurring at converter stations on the Dutch-German border (by the Dutch transmission system operator), and in the NetConnect Germany market area;

–

virtual conversion also occurred between the two gas types in GASPOOL and NetConnect Germany;

473 Case M. 5467, para 329 (wholesale) and para 370-371 (retail). In the same decision, the Commission left open the same question for the Dutch market noting however that both gas qualities could possibly be seen as part of the same market as the quality conversion cost were to be fully socialised in the near future. Large customers however strongly argued that two separate markets had to be recognised (para 140-143). See also the development on the Dutch market in Case M.3297, paragraph 12., and to the German and Dutch markets in the recent M.3410, paragraphs 16 and 22.

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2.309

–

declining LCV gas production; and

–

the socialisation of the German conversion fee in 2016 into the standard transmission fee charged to all operators.

Interestingly, the BundesKartellamt also found LCV and HCV gas to be part of the same relevant product markets in Germany in 2012.474

3. 2.310

Gas supply

The main distinctions within the gas supply market focuses on the wholesale and end-supply markets.

3.1 Wholesale market 2.311

The main issues addressed by the Commission in relation to the wholesale supply market concern the precise scope of the market and possible subdivisions within this market.

3.1.1 Scope of the wholesale market 2.312

The wholesale market normally includes supply to resellers. The main issue is the inclusion of very large end users within the wholesale market. In the gas sector, this includes not only large industrial customers but also gas fired power plants. Like retailers, these customers normally have buying power and are directly connected to the high pressure network.

2.313

Referring to the transportation network level as the main differentiating criteria, a distinction between wholesale and retail markets has been made based on earlier cases which noted that at wholesale level, gas is supplied via high-pressure transmission pipelines to industrial customers, power generators and local distribution companies, whereas at retail level, local gas companies supply gas to final consumers, such as business customers and households, through the lowpressure distribution pipelines.475

474 BKartA B8-116/11 Gazprom/VNG 31 January 2012. 475 Cases M.1383, paragraph 70; M.1673, paragraphs 180-183; M.2822, paragraphs 14-15; see also M.3294, paragraph 13.

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In more recent cases concerning Belgium, it was similarly suggested that a distinction could be made between eligible customers connected to the transmission network, such as suppliers, large consumers and electricity producers, and customers connected to the distribution network.

2.314

For the Commission, the distinction was strengthened by the fact that each of the two networks was operated by different entities and had different dominant suppliers.476

2.315

More recently, in Total/Gas de France (October 2004), a distinction was suggested between a wholesale market for supply to retailers, such as municipalities, on the one hand, and supply to final eligible customers, composed of industrial and commercial customers, on the other hand.477 Reference was made to the specific needs of retailers on the upstream supply market, because of the public service obligations relating to security of supply and the strong seasonal swing in demand involved in the supply to non eligible household customers.

2.316

Three recent Phase II cases and one important Phase I case have indicated that the markets for industrial customers and gas fired power plants should in principle be distinguished from both supply to resellers and smaller customers478.

2.317

In the ENI/EDP/GDP decision (December 2004), the Commission strongly rejected the parties’ submission that supply to large end-customers was part of a wider market including supply to retailers (which were local distributors), based on the fact that retailers have different supply and commercial needs and use different types of contracts and flexibility tools.479 The Commission highlighted the fact that bigger customers were significantly different in terms of “consumption, margins, tariffs and prices, commercial relationships/organisation of sales force and specific needs”.480

2.318

In DONG/Elsam (March 2006), the wholesale market was expressly defined as comprising “transactions between traders/resellers and not between a trader/sup-

2.319

476 Case M.3075-3080, paragraph 16; M.3318, paragraph 19; see also, concerning the Dutch market, the reference to a wholesale market in M.3297, paragraph 7. In a more recent case, The Commission however dismissed a distinction based on connection to the transmission network or to a distribution network, as traders compete to gain customers connected both to the transmission and distribution networks, and there are also large customers connected to the distribution networks (Eon/Mol 95). 477 Case M.3410, paragraph 21. 478 As regards smaller customers, see below at book paragraph 2.344. 479 Case M.3440, paragraphs 217-270. 480 Case M.3440, paragraphs 215-216.

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plier and an end customer”.481 The Commission however included sales to the major “central” power plants within the wholesale market, but only to the extent that they take over at least some of the services regularly provided by a supplier or intend to resell the gas. In this regard, the Commission listed the specific elements of retail supply: (i) the management of a supply portfolio; (ii) the booking and management of storage capacity and balancing requirements; (iii) the booking of transport “to the power plant gate” in order to meet a power plant’s exact demand on time, and (iv) the management of the associated risks. Apart from this exception, it was considered that supply of natural gas to large power plants constitutes a separate market from the market for the wholesale supply of natural gas, although with mutually low entry barriers. The Commission however added that, given the process of liberalisation, large power plants may at some point expand their activities into the wholesale market, “at which point a separate market for the retail supply to central CHPs would disappear”.

2.320

In GDF/Suez (November 2006), in relation to the French market, the Commission distinguished the market for trading on the Zeebrugge hub from supply to large customers, on the basis that the latter implies contracts of fixed duration and delivery at a certain point, whereas the former implies an immediate transaction with the hub as a delivery point.482

2.321

In the RWE/Essent decision of June 2009 concerning the German natural gas market, the Commission distinguished within the retail supply of gas market, retail gas supply to electricity power plants on the one hand, and retail gas supply to large industrial customers on the other hand from retail gas supply to small customers.483 The Commission retained these product market definitions in ENI484 (a 2010 Article 102 case) and in Centrica/Bord Gais Energy485 (2014) held there were distinct markets for the retail supply of gas consisting of: (i) the retail supply of gas to gas-fired electricity plants, while acknowledging that depending on their technical characteristics, some types of power plant may be within the market for industrial customers, (ii) the retail supply of gas to large industrial customers, and (iii) the retail supply of gas to small customers.

2.322

In its Statement of Objections in ENI, the Commission distinguished between markets for gas sales to wholesalers and to final consumers. The Statement of Objections distinguished three separate markets within the market for final 481 482 483 484 485

Case M.3868, paragraph 71. Case M.4180, paragraph 72. Case M. 5467, para 367. COMP/39.315. Case M.7228.

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consumers: supplies of natural gas to (i) power plants, (ii) (large) industrial consumers, and (iii) small customers (households and commercial customers).

3.1.2 Trading markets and hubs As in the electricity sector, a gas trading industry is rapidly developing in Europe. Trading markets, including gas hubs,486 start being identified as these markets develop. In the past it was traditionally recognised as a distinct product market487 but only expressly recognised and examined as such in more recent cases.

2.323

In E.ON/MOL (December 2005), a distinction was made between an emergent trading market and supply to local distributors. The distinction resulted from the regulatory framework: the public utility wholesaler has the exclusive right to supply the distributors for the sales to non-eligible residential customers and eligible customers that have not switched to alternative suppliers. The Commission noted that the market for the supply of gas to regional distributors would cease to exist as a separate market from the market for the supply of gas to traders at the latest in July 2007 when all customers will become eligible.488

2.324

In GDF/Suez (November 2006), as regards the French market, the Commission distinguished the market for trading on the Zeebrugge hub from supply to other retailers on the basis that, on the former, all actors act as both buyers and sellers.489

2.325

In ENI/Distrigaz (October 2008), the Commission has also considered whether the trading of natural gas on hubs constitutes a product market distinct from the wholesale supply market. In this context, the Commission defined a gas hub as an instrument which facilitates exchanges of gas amongst market players in order to allow buyers and sellers to find sufficient volume for supply or demand exceeding the capacities in the short term. For the Commission, the hub can be either physical in nature or a virtual trading point.490

2.326

486 A gas hub can be defined as an instrument which facilitates exchanges of gas among market players in order to allow buyers and sellers to find sufficient volumes for supply or to sell exceeding their capacities in the short term. It can be either physical in nature or a virtual trading point. 487 See recently cases M.3410, paragraph 13; M.3318, paragraph 14 and M.3080-3075, paragraph 13. In case M.3306, paragraph 10, the parties to the concentration had overlapping activities in “gas trading”, the market was however not affected by the transaction. The argument was made by the parties in M.2801, paragraph 23 and M.3410, paragraph 21 that trading of gas in Belgium was part of the wholesale market. See the developments on trading in the electricity sector at book paragraphs 2.62-2.82. 488 At paragraphs 101-106. 489 At paragraph 72. 490 Case M.5220, para 21.

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2.327

In RWE/Essent ( June 2009), the Commission looked at whether the Dutch TTF hub constituted a separate market. It ultimately left the question open but indicated that a number of elements suggested that it did not constitute a separate market as claimed. First, in an earlier decision, Nuon/Essent, the Dutch authorities found no reason to consider the TTF trade as a separate market, notably because (i) accession to TTF is relatively simple for market parties that whish to operate as shippers and (ii) suppliers of gas via bilateral contracts that do not trade via TTF also have the possibility to trade via this market place. Thus the NMa concluded that it was sufficiently plausible that the trade on TTF was already disciplined by the bilateral trade. Secondly, a vast majority of gas competitors questioned during the market investigation took the view that prices of gas traded on the TTF are close to prices of gas purchased by other means at wholesale level in the Netherlands, and that gas trading on the TTF is part of the Dutch wholesale market.

3.1.3 Submarkets within the wholesale market 2.328

Historically, in Germany, there were two levels of gas wholesale companies.491 This led, in Exxon/Mobil (September 1999) and VEBA/VIAG ( June 2000), to the recognition of two distinct wholesale markets in this country: the “longdistance” wholesale market and the “short-distance” regional wholesale market.492 In these decisions, this horizontal distinction within wholesale was key to the finding of the creation or strengthening of a dominant position. For the Commission, “ long-distance” wholesale was characterised by the import of large quantities of gas from producing countries, and the need therefore to have long term supply contracts with producers and the installations required for long-distance transport, as well as specific services to customers in particular as regards storage. The existence of a regional wholesale gas market in Germany, distinct from “ long distance” wholesale, was confirmed in a more recent case, in 2002, on the basis that large commercial customers and municipality-owned utilities tended to conclude supply contracts with gas wholesalers active in their respective regions.493 In 2003 however, the distinction, which was strongly doubted by the notifying parties as a result of market liberalisation, was left open by the

491 Large wholesale operators sell gas that they have imported directly from foreign producers and transport it over high pressure pipelines to the regional wholesalers or directly to certain large end-customers such as large business users and electricity generators; regional supply companies, which use short-distance medium and low pressure transmission pipelines, sell to local distributors and to certain end customers. 492 Case M.1383, confirmed in M.1673, paragraphs 180-184. 493 Case M.2822, paragraphs 13-15; see also M.2791, paragraph 11.

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Commission.494 The distinction, in relation to the German market, was however confirmed more recently in the RWE/Essent decision of June 2009495 in which the Commission has distinguished between a market for sales to regional resale companies (long-distance wholesale supply) and to municipal utilities – “Stadtwerke” (short-distance wholesale supply). In Gazprom/Wintershall/Target Companies, while leaving the market definition open, the Commission acknowledged that “some indications” in the market investigation pointed towards the existence of one overall wholesale gas supply market in Germany, on which both producers and non-producers compete.496 It noted that the vast majority of relevant market investigation respondents indicated there was no longer a distinction between (i) supra-regional wholesale supply to regional wholesalers, and (ii) supra-regional wholesale supply to distributors, following market liberalisation.

3.2 End (retail) customers Large and small customers have different consumption profiles, face different transport costs and pay different prices for their supplies.497 In line with the electricity sector, distinctions according to the size of customers were therefore often envisaged within the gas supply market.

2.329

In all decisions predating ENI/EDP/GDP, the precise product market definition had always been left open since no competition issues could be identified in all possible product market definitions envisaged. The existence of important price differentials between different categories of customer, even those with identical consumption profiles, was highlighted. For the Commission, this was mainly because prices are traditionally based on the alternative energy source to which the customer can switch: heating oil for households, heavy fuel for industrial users and, to a certain extent, nuclear energy or coal for power generators. Reference was also made to qualitative differences in supply arising from different consumption profiles and requirements.

2.330

494 Case M.3294, paragraphs 13-14; the parties wee arguing that short-distance wholesalers increasingly have a choice to contract their own imports, or to buy local production, being able to re-formulate their purchase decisions in case long-distance wholesalers were to increase prices, (and) there are no significant either entry or exit barriers for importing gas into Germany, as it is possible to negotiate access to any infrastructure needed for delivery under third-party access rules. 495 Case M. 5467, paragraph 329; see also in 2007 the recognition of these markets in M.4890, paragraph 11. 496 Case M.6910, paragraph 94. 497 Cases M.1383, paragraphs 51-53; M.3096, paragraphs 10-11; M.3007, paragraphs 17-18; M.3294-5, paragraph 15; M.3306, paragraph 11; and M.3410, paragraph 22. See the rejection of the price criteria in E.ON/ MOL, M.3696, paragraph 96.

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2.331

2.332

2.333

2.334

Electricity generators, for instance, have a high consumption pattern and lengthy supply contracts. Large industrial customers can accept interruptions to their supply in return for lower prices. As a consequence, for the Commission, in order to expand supply to a different category, it would be necessary to develop appropriate skills and competencies. As regards different types of customers, a distinction between “ large business users” or “ industrial customers”, and small household and commercial customers was suggested in Germany.498 In England and Wales, based on the historic timing of market opening to competition, in several cases a distinction between three segments within the gas supply market was also suggested: (i) domestic customers, (ii) small industrial customers, and (iii) large industrial customers.499 Reference was made to the fact that the above segmentation was generally used within the industry. In the same vein, it was envisaged in England and Wales and in Germany that supply of gas to electricity generators was a distinct market.500 In France, a distinction in relation to client activities, especially as regards electricity producers and industrial customers, was also put forward.501 A distinction between the distinguishing supply of gas on an interruptible basis and the supply on a non-interruptible basis has also been suggested,502 although interestingly, this distinction has so far not been made in the electricity sector. In four recent Phase II cases, ENI/EDP/GDP (December 2004), E.ON/Mol (December 2005), DONG/Elsam (March 2006) and GDF/Suez (November 2006),503 the Commission recognised distinct markets among end-customers, in Belgium, France, Portugal, Denmark and Hungary, for (i) power plants, (ii) industrial customers, (iii) small industrial and commercial customers and, (iv) possibly, domestic customers. The Commission highlighted the strong differences between these categories of customer as regards supply needs and commercial behaviour. In EPH/Stredoslovenska Energetika, the Commission’s market investigation confirmed that the market for the retail supply of gas could 498 Case M.3294-5, paragraph 15, see also the reference to a possible distinction between large and small customers in M.3268, paragraph 99 concerning Sweden and Finland; M.3086 concerning France; and M.3297, paragraph 11 concerning the Netherlands. 499 Cases M.3306, paragraph 11; M.3096, paragraphs 10-11; and M.3007, paragraphs 17-18. 500 Case M.3294-5, paragraph 15 in relation to Germany and M.3096, paragraph 11 in relation to England & Wales. 501 Case M.3410, paragraph 22. 502 Cases M.3294-5, paragraph 15; M.3306, paragraph 11; M.3096, paragraphs 10-11; M.3007, paragraphs 17-18 and M.3410, paragraph 22. 503 Cases M.3440, M.3696, M.3868, and M.4180.

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be segmented based on customer type.504 In ENI (Article 102), the Statement of Objections distinguished between markets for gas sales to wholesalers (that is, suppliers intending to resell gas to other wholesalers or downstream suppliers) and to final consumers. The Statement of Objections also distinguished between three separate markets within the market for final customers: supplies of natural gas to (i) power plants, (ii) large industrial customers, and (iii) small customers (households and commercial customers).

3.2.1 Power plants and large industrial customers Power plants were identified as a separate market within the end customer market, especially from other large industrial customers, in all the recent Phase II decisions. As indicated above, markets for gas fired power plants should also be distinguished from supply to resellers within the wholesale market.505

2.335

In E.ON/Mol, and GDF/Suez, for instance, the Commission made the distinction between the supply of gas to power plants and other large industrial customers on the basis of different consumption patterns (quantities and consumption profile), supply conditions, flexibility, needs, and marketing approach from gas suppliers. In GDF/Suez, the stronger seasonal variation of demand for power plants, and the direct connection to the transport network, were also highlighted. In DONG/ Elsam, the Commission focused on the fact that prices paid by central power plants are significantly below prices paid by large industrial customers.

2.336

In the ENI/EDP/GDP decision, the Commission strongly rejected the parties’ submission that a single market for supply to big end-customers included both power plants and large industrial customers.506 The Commission highlighted the differences in terms of supply needs and consumption patterns, as well as type, duration and flexibility provisions of contracts, and customer relationship.

2.337

The distinction is, however, not an absolute one. In E.ON/Mol,507 small power plants were considered part of the large industrial customers market. In DONG/ Elsam, this was left open. Subdistinctions can be made within the power plant market. In DONG/Elsam, the Commission concluded as to the existence of different product markets for

2.338

504 505 506 507

Case M.6984 See book paragraph 2.230. Case M.3440, paragraphs 217-270. Case M.3696, at paragraphs 100-124.

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supply to central and decentralised power plants (both consisting of combined heat and power plants producing both heat and electricity). For the Commission, decentralised power plants only had a limited degree of flexibility to switch between heat and electricity production as they could not “switch off ” heat production while producing electricity. In addition, central power plants consumed much larger amounts of gas, the seasonal consumption patterns of central and decentralised power plants varied significantly, and they used different types of contracts and had different pricing conditions.

3.2.2 Small business customers 2.340

In DONG/Elsam (March 2006), for instance, the Commission considered that small business customers did not belong to the same product market as large business customers and power plants, as prices, marketing and distribution channels, costs and market structure, switching rates and price sensitivity of customers are substantially different. The Commission highlighted the fact that large industrial customers and small business customers also had different demand patterns: large industrial customers have a rather flat and stable demand subject to little seasonal variation, whereas the demands of small business customers mostly follow heating requirements. The Commission added that metering requirements did not exist for small business customers.

2.341

In E.ON/Mol (December 2005),508 the Commission similarly highlighted the differences in terms of consumption patterns (quantities and consumption profile), supply conditions, flexibility needs, and marketing approach from gas suppliers.

3.2.3 Domestic customers 2.342

The existence of a separate market for domestic customers distinct from small business customers was left open by the Commission in E.ON/Mol and DONG/ Elsam. In GDF/Suez, the Commission identified a market for domestic customers on the basis of the different timing of market opening.

2.343

In the past, as for electricity markets,509 and in line with the distinction adopted by the EC Directives in relation to end customers, the opening of gas markets in Europe led to an distinction being made between eligible and non eligible customers, as the former were free to choose their supplier, whereas the latter 508 Case M.3696, at paragraphs 100-124. 509 See the same distinction for electricity at book paragraphs 2.35-2.37.

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were supplied by a national or local monopoly.510 The competition assessment therefore normally focused on supply to eligible customers.511 In ENI/EDP/ GDP and GDF/Suez (for Belgium but not for France), the Commission however considered that it should assess the foreseeable effect of a concentration on markets that would be opened up to competition in the following years following a clear and binding timetable imposed by the Gas Directive.512 Markets for all domestic customers were due to be liberalised under EC law as from July 2007 so that this distinction would no longer be relevant.513 However, under the legal framework of some Member States, such as France, Spain and Portugal, there are “regulated” eligible customers, i.e. customers that are eligible to switch but remain under the pre-market opening regulated framework until they opt to join the free market.

3.2.4 Regulated and open segments of the market In E.ON/MOL, the Commission rejected any distinction between the regulated and open segments of the market, on the basis that eligible customers can easily switch back and forth between the free and the regulated (i.e. customers that have not opted for the liberalised market and are supplied by the incumbent) segments of the market, and switching does not entail any significant costs or time for eligible customers.514

2.344

In GDF/Suez, the Commission took the reverse approach, taking into account only the market for eligible clients who had exercised their switching rights under French law.515 This can be explained by the fact that, in France, customers could not return to the regulated market.

2.345

510 See Volume I, EU Energy Law. All non-households had to be open to competition on 1st July 2004. All households must be open to competition by 1st July 2007. 511 See cases M.1383, paragraph 54; M.3075-3080, paragraph 16; M.3318, paragraph 19 in relation to Belgium; M.3410, paragraph 20 and M.3086, paragraphs 11&25 in relation to France. See also the recognition of a market for the supply of gas to non eligible household customers in Belgium (M.493, paragraph 30). 512 Case M.3440, paragraphs 210-214; case M.4180, paragraphs 85 (Belgium). and 340-343 (France). 513 Finland, Latvia, Greece and Portugal however have been granted derogations from market opening (see Volume I, at Chapter 11). 514 Case M.3696, paragraph 94. 515 Case M.4180, paragraph 353.

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4.

Gas transportation

2.346

The existence of a distinct market for gas transportation has traditionally been recognised516 by the Commission. In line with the electricity sector and following the approach of the EC internal market Directives, in recent decisions, a further distinction was made between transmission, and distribution.517 The definitions of transmission and distribution generally used conforms to the definition of the Gas Directive: “transmission” is defined as “the transport of natural gas through a high pressure pipeline network other than an upstream pipeline network with a view to its delivery to customers, but not including supply”; and “ distribution” as “the transport of natural gas through local or regional pipeline networks with a view to its delivery to customers, but not including supply”.518

2.347

Following market liberalisation, and the implementation of unbundling and third party access to networks, it should be noted that transmission and distribution only concern transport services, and not supply.

2.348

In E.ON/Mol (December 2005), it was noted that both the transmission and distribution of gas constitute a natural monopoly.519 In GDF/Suez (November 2006), it was not considered as a relevant market on the basis that gas transportation is subject to a regulatory monopoly.520

5. 2.349

Distribution

In ENI, the Statement of Objections distinguished between high pressure transmission networks and low pressure transmission networks, given that competitive conditions significantly differ between the two.

516 Cases M.493, paragraph 29; M.1383, paragraph 69; M.3294, paragraph 11; M.3306, paragraph 10; M.3318, paragraph 14 and M.3080-3075, paragraph 13. 517 Cases M.3318, paragraph 14 and M.3080-3075, paragraph 13 for Belgium; M.3410, paragraph 15 for France; and M.3696, paragraphs 97 and 98 for Hungary. 518 Articles 2(3) and 2(5). 519 Case M.3696, paragraphs 97 and 98. 520 Case M.4180, paragraph 58.

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6.

Gas storage

Gas demand varies both seasonally and within individual days or weeks. To cope with these variations, gas companies require a considerable amount of flexibility. The transmission system operators also require flexibility in order to balance imbalances of supply and demand within the network and to cope with emergency situations. The most important flexibility tool is gas storage, allowing for gas to be stored when supplies exceed demand and to be withdrawn when demand exceeds supply. It also contributes to the balancing of the gas network and ensuring security of supply.

2.350

6.1 Gas storage and gas flexibility In earlier decisions, the Commission found that gas storage constitutes a separate product market.521

2.351

Other flexibility tools are arguably substitutes for storage: interruptibility or other modulation of customers’ demand, flexible supply contracts, flexible trading in gas hubs or bilaterally, and line-packs (a method of storing gas in the transport pipelines by increasing or decreasing the gas pressure in those pipelines).

2.352

In recent decisions, especially the Total/GDF decision and the Phase II DONG/ Elsam decision of March 2006, the Commission looked at the question of the substitutability of gas storage with these other flexibility tools.

2.353

In the Total/GDF decision, it concluded that other flexibility tools such as flexible or interruptible supply contracts cannot sufficiently fulfil the same functions as physical storage, confirming that storage should be seen as a distinct product market.522

2.354

In DONG/Elsam, the Commission looked in more details at the question of the substitutability of gas storage with these other flexibility tools in relation to the Danish market. Although it left the issue open, it stated that the market investigation confirmed flexible supply contracts that they may be considered as fairly good substitutes for physical storage, provided they are available to all customers and offer a high degree of flexibility.

2.355

521 Case M.1383, Exxon/Mobil, and M.3410, Total/GdF. 522 Paragraphs 67 and 68.

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2.356

With respect to modulation of customers’ demand, the Commission considered that flexible consumption by power plants is an important actual and potential means of achieving flexibility and therefore also constituted a close substitute for storage both for seasonal and short-term flexibility and emergency supply. Because power plants accounted for a very large part of the Danish overall consumption (approximately 20-25%), any demand shift therefore had an impact on the overall demand of gas.

2.357

Because prohibitive payments to the transmission system operator were due if the daily imbalances exceeded a certain threshold, line-pack storage was considered to be insufficiently flexible, even for short-term demand variations, as soon as these exceed the duration of one day. It therefore did not constitute, for the Commission, a relevant alternative to storage in physical storage facilities. Flexible trading at gas hubs or bilaterally was also not a viable flexible storage alternative, as there was very little flexible trading in Danish hubs, and Danish customers generally considered other hubs too remote for flexibility purposes. The Commission however left open the possibility that in the future, flexible trading could form part of a wider storage/flexibility market.

6.2 HCV and LCV gas storage 2.358

The Commission has historically considered distinguishing between storage facilities suitable for HCV gas and storage facilities suitable for LCV gas, while leaving the question open.

2.359

In Gazprom/Wintershall/Target Companies (2013), the Commission stated that the market investigation had provided indications that in Austria and Germany, the interchangeability of HCV gas storage facilities and LCV gas storage facilities followed “the existing degree of interchangeability” between HCV and LCV gas. The Commission noted that the majority of respondents to the market investigation believed that both HCV and LCV gas storage facilities would belong to the same relevant product market in the absence of the existing conversion fee for conversion between HCV gas and LCV gas. As this conversion fee is due to be incorporated into the general transmission (entry/exit) tariff charged to all operators in 2016 and therefore cease to exist, the Commission acknowledged that at least in Germany, both HCV and LCV gas storage facilities may belong to the same relevant product market in the near future.

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6.3 Pore and cavern storage The storage market for natural gas has also been considered to be capable of being subdivided into pore and cavern storage: pore storage is especially well suited for changes in seasonal demand as well as for the storage of high volumes of gas. Cavern storage is better suited for rapid changes in local demand because gas can be injected and withdrawn more rapidly.523 This issue was, however, always left open as market investigations have showed that pore and cavern storage are to some extent substitutable.

2.360

7. Network asset management and operation and network services In markets that have been open to competition for a number of years, the maintenance and operation of network assets, traditionally carried out by the owner of those assets in the electricity, gas and water industries, are increasingly being carried out by independent contractors, leading to the emergence of a competitive market. The question therefore arises – in relation to electricity524 – of the recognition of a distinct relevant product market for such services. In two decisions concerning the UK market it was suggested that, within the distribution market, a distinction could be made between the ownership and operation of utility network assets.525 Utility network assets was defined as the infrastructure by means of which not only gas and electricity, but also heating, water and telecommunications services are distributed. Their management includes “the construction of new assets, the maintenance of existing assets and the operation of those assets in the most efficient manner possible”. In both decisions, whether network asset management and operation forms part of a separate product market from the distribution of gas, or whether, if it existed, it should encompass not only electricity, but also gas and water networks was left open.526

2.361

In one decision, the existence of a market for natural gas related logistic services was envisaged.527 The activity of the joint venture at stake was to assist gas traders in managing the transport of gas through networks owned by third parties,

2.362

523 524 525 526

Case M.1383, paragraph 262; Case M.3086, paragraphs 14-15 and Case M.3410, paragraph 18. See above, at book paragraph 2.97. Cases M.2679, paragraphs 14-15 and JV.36, paragraphs 22-24. In JV.36, paragraph 23, the parties argued that the market covered the management and operation of electricity, gas and water networks, since “ identical management skills are required for each and the regulatory authorities set out certain criteria and standards that similarly apply to all three sectors”. The Commission however considered that “the management and operation of each type of network (electricity, gas and water) might constitute a different product market due to the different nature of the services”. 527 Case M.2744, paragraphs 15-17.

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i.e. to provide customers with the most cost efficient transport of natural gas, referred to as “transport services”; and to provide services to network owners and operators relating to the management and handling of commercial obligations resulting from third party access, referred to as “network services”.

2.363

Whether the provision of natural gas related logistics comprising of transport services on the one hand and network services on the other hand belonged to the same product market was left open: the two services are derived from the obligation to grant access to third parties to gas networks, but it is possible to access the market without offering both services.

2.364

As explained at book paragraph 2.97 above, it appears very likely as liberalisation progresses, that transmission system operator will increasingly outsource such services. Where they do, it is submitted that a relevant product market for such services will develop.

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CHAPTER 5 The relevant geographic market – Gas 1.

Introduction

In line with the above product market definition, within the gas sector, an distinction should be made between upstream and downstream activities. In relation to the upstream gas sector, the market for exploration of oil and natural gas is traditionally considered to be worldwide,528 and the market for development and production of natural gas to probably include the EEA, Algeria and Russia. As for the UK, the market for the offshore transportation and processing of gas was defined as the UK North Sea divided into the northern and southern parts.529

2.365

The following developments relate to downstream markets on which gas is considered to be a distinct market from other energy sources. In line with product market definitions in the gas sector, distinctions should be made between markets relating to supply, transport and storage.

2.366

2.

Gas supply

The Commission has never formally recognised geographic market definitions wider than national markets for gas supply, rather focusing on the existence of infra national markets. In recent decisions however, an evolution can be seen in relation to trading and gas hubs.

528 Case M.5585, paragraph 9; M.1532, paragraph 6. 529 Cases M.1532, paragraphs 42-48; M.5585, paragraph 13.

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2.1 No wider than national markets 2.368

Before market opening in Europe, the geographic scope of the gas supply markets in the EC was logically no wider than national.530 However, even following market opening and the Gas Directive, the Commission has systematically taken the view that gas markets remain at least national in scope. The limited analysis often provided in decisions by the Commission when reaching this conclusion would suggest that the definition of national market in the gas sector currently results to a large extent from strong inertia, rather than sound reasoning.531 In relation to market structure, the Commission generally states that supply markets are no wider than national since the wholesale supply of natural gas is largely a national activity,532 or that the historic ex-incumbent company is dominant in its country where operators from neighbouring countries have not significantly penetrated.533 It has often been the case, including in several Phase II cases ENI/EDP/GDP (December 2004), E.ON/Mol (December 2005) and GDF/Suez (November 2006),534 that the possibility of a wider than national market is not even contemplated by the notifying parties and therefore not discussed535. In E.On/Endesa, (April 2006) the Commission also strongly hinted to the fact that German, Italian, French and Polish gas markets are not wider than national.536 However, as discussed below, this appears to be changing.

530 See the statement of principle made by the Commission as early as 1994 (M.493, paragraphs 21-25). 531 Even when it has an impact on the competition analysis: see recently M.3268, paragraphs 100-101 in relation to the Nordic market, where the merging parties were active on two different Nordic countries. It was simply stated that “Both Sydkraft and Graninge are active on the market for supply of gas. However, Sydkraft is only active in Sweden and Graninge is only active in Finland. The Commission has in previous decisions defined the geographic market for the supply of gas to be national in scope”. The decision referred to (3007) concerned the UK market. 532 See, recently, for the Netherlands: case M.3297, paragraph 14; Germany: M.3294, paragraph 20; Sweden and Finland: M.3268, paragraphs 100-101. In an earlier case, Germany and the Netherlands were identified as two distinct national markets because of the national ownership of the infrastructure, and as the conditions for third party access were essentially determined on a national basis (M.1383, paragraphs 135-136). 533 See, for Belgium: cases M.3075, paragraphs 23 and M.3318, paragraph 30. See also, as regard France, the indication that the French incumbent company, Gaz de France, holds strong positions in the supply to customers in France but not in other territories in M.3086, paragraphs 12-13 (this was considered as a strong indication that the market was national, although the precise market definition was left open). See also the definition of a market for Great Britain in M.3007, paragraph 27; M.3096, paragraph 12 and M.3306, paragraph 13 where the analysis focus on the existence of infra national markets, see below at book paragraph 2.385. 534 Cases M.3440, paragraph 271; M.3696, paragraph 125, and M.4180, paragraph 100. 535 See recently, as regard France, case M.3410, paragraph 32 or Portugal, M.3440, paragraphs 271-273. 536 Case M.4110, para 25. For the Dutch market, see case M. 4370, for the Czech market see case M. 4238, for the Belgian market, see case M.3883.

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A significant issue in relation to geographic market definition in the gas sector is the existence of sufficient physical transportation capacity (i.e. pipelines) between Member States to meet demand and permit cross border competition to exist. Without sufficient transportation capacity a territory is isolated from neighbouring countries and cannot be part of a wider market.537 In the gas sector, in contrast with the electricity sector, it is generally considered that there is enough physical transportation capacity to meet demand and enable competition between Member States. However, the capacity is often booked under long term contracts – normally by national ex-incumbents – and is therefore not available to new entrants.538 As an illustration of this, it was considered that despite strong interconnection capacity with neighbouring countries, Belgium was seen as a separate national market: this interconnection capacity could not lead to significant competitive pressures from operators of neighbouring countries as the capacity was either booked under long term contracts by the historic incumbent Belgian operator, or used for transit of gas outside Belgium.539

2.369

It is uncertain how long it will take for markets wider than national markets to develop in Europe as a result of liberalisation in the gas sector.540 However, as the liberalisation of gas markets in Europe took place two years after the liberalisation of the electricity markets, and it is also generally considered that competition is less well developed in the gas sector, this may take some time. In particular regulatory issues – such as access to storage – are still not the subject of legally binding common rules at Community level. Furthermore, customer

2.370

537 This was made clear in a case where Finland was considered to be a separate market since it was not connected to any other Member State (M.931, paragraphs 22-23). Reference was made to the fact that, as submitted by the parties, “the geographic market depends on the location of the pipelines”. 538 See case M.3440, paragraph 273; see also Volume I. 539 Cases M.3075, paragraph 23 and M.3318, paragraph 30. In addition, the interconnector between the United Kingdom and Belgium was not well functioning and could not represent a secure source of supply. In both cases, the definition of Belgium as the relevant geographic market was of particular importance as it was conditioning the possibility to refer the case to the Belgian competition authorities; the analysis was therefore more elaborated. 540 The evolution towards wider than national markets was already referred to as early as in 1994 (M.493, paragraphs 21-25); it is also envisaged in the more recent decisions (see e.g. M.3297, paragraph 15: “ it may be left open whether, due to Directive 2003/55 and other efforts to liberalise the gas market, the relevant geographic market could in the future become larger than only the Netherlands ). In 2822 (at 2.4), reference was made to the fact that the Commission cannot assume with the required degree of certainty that the characteristics of the gas markets will change in the short-term, it must rely on the current characteristics of the concerned markets which are regional in scope. See, generally, on the consideration to be given to evolution for the purpose of market definitions the General Introduction at book paragraph 2.11 and the developments concerning the electricity sector at book paragraphs 2.105-2.119. See also the data concerning the structure and evolution of the gas markets in EC Member Sates, as a result of the Gas Directive, in the Communication from the European Commission to the European Parliament and the Council of 10 January 2007, Prospects for the internal gas and electricity market, available at http://ec.europa.eu/energy/ electricity/report_2006/index_en.htm.

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switching in the gas market is far behind the electricity market in virtually all Member States. In this light, it appears that, with the possible exception of some organised trading markets, relevant geographic markets in the gas sector which are wider than national markets can be expected to be some years away.

2.371

In the DONG/Elsam case (2006) concerning the geographic scope of the gas wholesale market in Denmark was discussed in detail. Contrary to the submission of the notifying party that the relevant geographic market was wider than Denmark and included at least Germany, the market investigation conclusively showed, for the Commission, that the market for wholesale supplies of gas was no wider than national.541 This was for the main following reasons.

2.372

First, all gas consumed in Denmark was produced in Denmark. This gas was exported to Germany and Sweden, but no imports took place or were likely to take place in the future. The Commission highlighted the relevance of the physical origin of the gas, as contractual gas sales do not in its view provide for the same security, and often not the same flexibility of supply as physical gas, and there were constraints as to the possible shifting of physical gas from Denmark to other markets, in particular due to capacity constraints of export pipelines.

2.373

Secondly, in 2003-2005, commercial imports represented a very small amount of total Danish consumption (less than 12%), and therefore did not exert any strong competitive constraint. Moreover, hub trading was very low, and swapping only constituted 5% of total supply volume, so that gas was not readily available to be transported to Denmark.

2.374

Thirdly, prices in other countries or hubs had little impact on the wholesale price situation in Denmark which was driven by other demand factors. In addition, Danish wholesale gas customers generally considered importing gas a weak substitute to the availability of wholesale gas in Denmark. Moreover, wholesale gas suppliers seeking to import gas would face significant transport costs through network “pancaking” capacity constraints and important administrative obstacles (such cost negotiations, negotiation on reservation terms, and the risk of reservation cancellations).

541 Cases M.3868, paragraphs 147-192. The Commission left open the possible existence of a Swedish market encompassing Sweden and Denmark as Danish transactions might constrain Swedish ones but not the other way round. It also left open the possible inclusion within the Danish market of the German side of the Danish entry/exit point at Ellund to the extent that this gas was actually used for wholesale supplies for Denmark.

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Fourthly, the market structure in the different countries showed very considerable differences in the market shares of the different players, with in particular DONG reaching market shares largely above 60% in Denmark but less than 10% in Germany, the Netherlands, Belgium and the United Kingdom. The Commission highlighted the fact that it had taken account in its appraisal of these market positions the continuing process of market integration in the Community, considering that “this process, in regard to the gas markets is not at such a stage nor can be expected to be at such a stage within the near future or indeed the foreseeable future with sufficient certainty, as to render current very important market share differences of mere historic relevance”.

2.375

However, recent Commission cases appear to indicate that the Commission is opening up to the idea of geographic markets which are larger than national.

2.376

In the ENI Article 102 case, the Statement of Objections (issued in 2009) concluded that for the purposes of that case, the entirety of the viable routes that could be used by a shipper or supplier to bring gas to the wholesale market in Italy constituted the relevant market, although on the facts it found that the existing supply routes to and from Italy constituted the relevant market given the lack of competitive constraints from transportation services other than ENI’s import infrastructures.

2.377

In Gazprom/Winterhall/Target Companies (2013), while leaving the exact geographical delineation open, the Commission acknowledged that the market investigation respondents indicated that both the supply and demand side of the upstream wholesale gas supply market formed part of a regional geographical market, although not an EEA-wide market. It noted the following:

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–

most respondents considered that this regional market encompassed several EEA Member States (in particular, Germany, Belgium, the Netherlands, and the UK);

–

parties active on the demand side of the upstream wholesale gas supply market in Germany indicated gas could be directly sourced from at least one of Norway, the UK, or the Netherlands;

–

upstream producers confirmed they would divert volumes to Germany, away from “at least the Netherlands”, if there was a non-transitory, significant increase in German gas prices;

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2.379

–

there were no indications of restricted interconnection capacity limiting the amount of gas capable of flowing between the Netherlands, Norway, and Germany; and

–

there appears to be increasing price convergence between gas prices quoted on gas trading hubs “located in the putative regional gas market”.

Similarly, in Centrica/Bord Gais Energy (2014),542 while leaving the exact geographic market definition open; the Commission noted the market investigation in this case confirmed the geographic market was at least national and “might” encompass the Republic of Ireland and the UK. The Commission noted that: –

almost all respondent customers from the Republic of Ireland considered there were homogenous conditions of competition in the area encompassing the Republic of Ireland and the UK (including Northern Ireland);

–

almost all of these respondent companies actually purchased their gas in the UK; and

–

almost all customers stated there is sufficient interconnector capacity between Great Britain and the Republic of Ireland.

2.2 Smaller than national markets 2.380

Markets of infra national scope may still exist, even after the suppression of regional monopolies. In 2002, it was decided in ENBW/ENI/GVS (December 2002) that the German market for the “short-distance” (or regional) wholesale of gas was still limited to regional areas corresponding to the former monopolies held by regional distributors prior to liberalisation.543 This was because most large industrial customers and municipality-owned utilities were still supplied by gas wholesalers active within their regional area in which they operated prior to liberalisation. In addition, customers did not consider the use of spot markets to be a viable alternative supply source, as their supplies could only be used for small volumes under short-term delivery contracts. In this respect, municipality-owned utilities were found to be too inexperienced in managing spot pur542 Case M.7228. 543 Case M.2822, paragraphs 16-31. The possible regional scope of the German market was examined in the earlier M.1383, paragraph 152 and 1673, paragraphs 185-186 cases. In both decisions, the issue was left open.

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chase on a continuous basis to secure permanent gas supply. Furthermore, the first EC liberalisation directive544 had not been properly implemented so that key steps necessary to make the gas market fully open to newcomers had not yet been fully implemented. In particular, transmission tariffs were not transparent and remained distance related, and the need to enter into several third party agreements with each regional network owner made it costly and complicated for alternative suppliers to transport gas over long distances. It was therefore concluded that the market was still regional in scope “and likely to remain so in the future”.545 In the more recent RWE/Essent decision ( June 2009), the Commission concluded that the geographic market for the wholesale supply of natural gas in Germany is at least regional and corresponds to the geographic extension of the respective grid areas of the long-distance transmission companies for the long-distance wholesale supply market and the short-distance transmission companies (regional resellers) for the short-distance supply market.546 The situation is different in Great Britain where, contrary to Germany, the transport network in each regional supply areas was owned by a national company instead of different regional companies. The fact that the vast majority of the population of Great Britain is served by the same natural gas pipeline network, operated by the same company for both the high-pressure transmission system and the lower pressure distribution networks, was taken to conclude that no infra-national market existed, as was the absence of significant differences in the regulatory framework applying to England and Wales as compared to Scotland was taken into account.547

2.381

In several decisions concerning Belgium, including recently in GDF/Suez (November 2006),548 the Commission similarly took the following facts as indications that no infra national markets existed: (i) most of the relevant regulations, including third party access rules, was set at national level, (ii) transport networks were managed on a national level, and (iii) as a result of nationally homo-

2.382

544 EC directive No. 98/30 of 22 June 1998, see Volume I. 545 In a more recent case (M.3294, paragraph 18), the parties submitted that the wholesale market was “at least national and possibly wider”, because of the market evolution as a result of the ongoing liberalisation of the gas sector following the Second Gas Directive. They argued that “all Germany is interconnected by a series of transmission lines which, together with the non-discriminatory access to them, facilitates competing suppliers at national level to bid for the supply of gas to local distributors, power generators or industrial customers”. The decision does not take any position on the issue. 546 Case M.5467, paragraph 329. 547 Cases M.3007, paragraph 27; M.3096, paragraph 12; and M.3306, paragraph 13. 548 Cases M.3318, paragraphs 29-33, M.3075, paragraph 23, M.3883 and M.4180, paragraphs 102 to 104 (see a similar reasoning on Belgium in the early case M.493, paragraph 32 where the precise market definition was left open).

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geneous competitive conditions, prices were determined at national level for the whole of Belgium. The existence of certain regulatory specificities for the Brussels region, including a temporary difference in the timing of market opening among the region, was however an indication that regional markets could still exist. In all these case, the Commission left the issue open.

2.383

In Total/Gaz de France (October 2004), the existence of local supply markets within France was not excluded since several tariff zones and congestion existed within the French territory. In addition, access to the network through entry points was not possible everywhere on a homogeneous basis, network access being far easier for competitors of Gas de France in the more Northern and Eastern zones than in the South of France.549

2.384

In GDF/Suez (November 2006),550 this analysis was confirmed, the Commission concluding that the geographical markets have to defined according to the existing balancing zones as competitive conditions between these zones are significantly different due to barriers to entry from one zone to another such as transmission costs, different physical congestion, insufficient interconnection capacity and considerable different link tariffs. The market integration process however leads to the progressive reduction of the balancing zones. The more recent decision ENI/Distrigaz (October 2008) therefore took into account in its market definition the merging of the North, East and West into one single new North zone as of 1 January 2009.551

2.385

In the same way, in E.ON/Mol (December 2005),552 the fact that Hungary constituted a single balancing zone and under the new entry/exit fee system the tariff was the same for all points, led to the definition of a national wide market.

2.386

Market opening to all customers, which is compulsory under EC law as from July 2007, has a tendency to harmonise market conditions and the national level regulatory framework, and led to the recognition of nationally wide markets. In ENI/EDP/GDP (December 2004), it was stated that, based on the experience in Spain, the market for gas supply to small customers in Portugal would probably rapidly evolve to a national market following market opening.553 Similarly, in GDF/Suez (November 2006) it was noted that market opening was to applied soon to all customers in all Belgian regions which was to bring about a progres549 550 551 552 553

Case M.3410, paragraph 33. Case M.4180, paragraphs 380 to 385. Case M. 5220, paragraph 28. Case M.3696, paragraph 136. Case M.3440, paragraphs 274-278.

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sive convergence of competition conditions in all regions.554 A reference to the integrative effect of market opening for domestic customers was also made in E.ON/Mol (December 2005).555 The existence of distinct networks for high calorific value gas (HCV) and low calorific value gas (LCV) has also lead to a regional market definition for gas supply. In the above-mentioned decisions concerning Belgium,556 it was suggested that the Brussels or the Flemish regions could constitute distinct markets as exclusively or predominantly LCV gas was supplied in these regions.

2.387

2.3 Trading and gas hubs In GDF/Suez (November 2006), the Commission found that gas trading at the Zeebrugge Hub was part of the same market as the English NBP hub.557 The fact that the interconnector linking Zeebrugge to England (the “Interconnector”) was often congested and that there were significant price differences between the two hubs (in particular due to the cost of using the Interconnector) could have been seen as evidence of the existence of separate markets, particularly following the Commission’s analysis of electricity spot markets.558 The Commission however, focused on the growing price convergence between the two hubs. There had been a price difference of 7,5% for 17% of days from 2000 to April 2006, but only for 8% of days from July 2004 to June 2006, despite strong diverging trends at time of heavier congestion such as winter 2005/2006. The fact that the Interconnector’s capacity was to be strengthened, and that, as a result of the commitments given by the parties, the liquidity on the hub was to be increased therefore contributing to more converging prices, was also taken into consideration. The Commission however considered that the market comprising the NBP and Zeebrugge hubs was distinct from the Dutch TTF hub because of more important price differences, despite the fact that the exchange market on the three hubs was being operated by the same Dutch company APX Gas. 554 555 556 557 558

Case M.4180, paragraph 104. Case M.3696, paragraph 140. Cases M.3318, paragraphs 29-33, M.3075, paragraph 23, M.3883 and M.4180. Case M.4180, paragraphs 87 to 99. See book paragraph 2.283.

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2.391

In E.ON/MOL (December 2005), the Commission however considered that the trading market was national in scope, despite the fact that gas for the Hungarian market was procured from international companies such as Gazprom, E.ON, and GDF, and was commonly traded at the European level. The Commission considered that the relevant geographic market was to be defined by the destination of the product, i.e. the Hungarian markets as gas imported into Hungary is not re-exported and is solely intended to meet Hungarian demand. Competition was therefore taking place at the Hungarian level. The Commission however concluded that the supply side (procurement) of the wholesale supply of gas was clearly international in scope.559 As previously mentioned, in ENI, the Commission concluded the existing supply routes to and into Italy constituted the relevant geographic market, given the lack of competitive constraints from transportation services other than ENI’s import infrastructure. The Commission also stated in E.ON/MOL, and reiterated in EPH/Stredoslovanska Energetika, that the narrowest possible delineation of the geographic market is the region covered by the physical infrastructure grid.

3.

Transport and storage infrastructures and related services

3.1 Gas transportation 2.392

In Total/Gas de France (October 2004), the existence within France of transport markets limited to a regional tariff area was not excluded. The main reasons for this finding were that (i) transport tariffs in France were dependent on distance560 with a specific fee to be paid for crossing zones, (ii) the structure of tariffs was different in each zone as, although being decided by national authorities, they were based on the specific costs of the local operator, (iii) the conclusion of a specific transport contract with the local operator was necessary, and finally (iv) congestion existed between zones.561 The above considerations seem more relevant to the definition of geographic supply markets rather than geographic transport markets. It is submitted that each pipeline defines its own geographic market scope or more precisely each entry point to each exit point – unless another pipeline or other entry to exit points – can achieve gas transport from the same two geographic destinations under comparable conditions.

559 Case M.3696, paragraphs 131 to 133. 560 Because of the important congestions existing within the French network, distance can be a significant element of the French entry-exit tariff system. 561 Case M.3410, paragraphs 23-26.

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In E.ON/Mol (December 2005), the Commission concluded that the market for transmission was owned and operated on a national basis and therefore national in scope, and that the market for distribution was owned and operated on a regional basis and therefore regional in scope.562

2.393

3.2 Gas storage and flexibility tools In Exxon/Mobil (September 1999), concerning Germany, the Commission distinguished between the relevant geographic markets for pore and cavern storages.563 It considered that it is only viable for customers to use pore storage within an area of a maximum of 200 kilometres from the storage site, whereas for cavern storage the distance from end users is limited to 50 kilometres. As a consequence, competitive pressures from other storage facilities do not exist outside these geographic areas which determine the scope of the relevant geographic market for each of the two different types of storage. The above finding in Exxon/Mobil led the Commission to envisage the existence of regional storage markets within France, especially given that it considered that the existence of different tariff zones within France contributed to the cost of transport between storage facilities.564 The principles developed in Exxon/Mobil were, however, ignored in cases concerning Belgium,565 where reference was simply made to the fact that, as shown by the market study, storage in neighbouring countries did not represent an economically viable alternative to storage in Belgium, as both transport and storage facilities in the neighbouring countries were expensive. It was therefore suggested that the storage market in Belgium was of no wider than national scope.

2.394

The geographic scope of the Danish storage market was key to the Commission’s analysis in the recent Phase II DONG/Elsam decision (March 2006).566 The parties submitted that the relevant geographic market was wider than Denmark and also encompassed Sweden, northern Germany and the Netherlands. The Commission however concluded that the geographic market for storage or for flexibility services was confined to Denmark for the main following reasons.

2.395

562 Case M.3696, paragraphs 126 and 127. 563 Case M.1383, paragraphs 262-263. The distinction was confirmed for Germany in M.3086, paragraph 16; and referred to in M.3410, paragraph 27. 564 Case M.3410, paragraphs 27-30. 565 Cases M.3318, paragraph 31 and M.3075-3080, paragraph 25. 566 Case M.3868.

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2.396

In Germany and the Netherlands, storage tariffs were significantly higher. In addition, any physical transport from Denmark to the storage in Germany would cause additional transport costs, including entry and exit fees in the different transmission networks. The complexity of synchronising the reserved storage and transport capacities with the actual gas needs would add to the difficulty of storage abroad. In particular, the transport capacity reservations needed would be difficult to obtain and very expensive.

2.397

Applying the Exxon/Mobil distance criteria, the Commission considered that storage could also encounter technical difficulties, at least in emergency situations, as the closest German cavern storage was located more than 50 km, from the Danish border, and the closest pore storage was located about 200 km from this border. In addition, respondents to the Commission’s market investigation generally considered it more efficient to store near the area where the gas is used and expressed considerable doubts as to the possibility of storage abroad. Moreover, most flexibility tools were only available on a national level, cross-border flexibility being therefore extremely difficult.

2.398

As for Sweden, storage capacity in Sweden was too limited to constrain a monopolist in flexibility/storage services in Denmark. The Commission, however, admitted that the market for storage in Sweden could be Danish-Swedish in scope due to a certain dependency of Sweden on the provision of Danish storage facilities. Similarly, while the Commission left open the exact delineation of the relevant product market in Gazprom/Wintershall/Target Companies, it acknowledged that the large majority of respondents confirmed that the market for the storage of natural gas in Germany was at least national in scope and should include and Haidach and 7 fields facilities located in Austria but connected to the German grid.

2.399

More generally, in E.ON/MOL, the Commission acknowledged a potential future broadening of the geographical market in line with the further liberalisation of the European gas market.

3.3 Network asset management and operation and network services 2.400

No position has yet been taken as to the relevant geographic market for utility network asset management and operation. As regards the British market, the parties have suggested in two decisions that the relevant geographic market covered at least England, Wales and Scotland, since the same conditions of competition apply throughout this area, and possibly in the future could extend to 136

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cover the EU, as the markets develop and the regulatory regimes across Europe converge.567 Equally, no position has yet been taken as to the relevant geographic market for transport and network services. In one case, it was suggested by the parties that the market was at least national in scope.568 As with respect to electricity,569 it is submitted that these markets are likely to be, or become, at least European wide in scope.

567 JV.36, paragraph 29 and M.2679, paragraph 20. 568 M.2744, paragraphs 19-21. With regard to transport services, the parties argued that the related services could be provided on a Community wide basis, the joint venture being active in all Member States and Switzerland. In relation to network services, the parties argued that the market might have a more narrow scope, network services being only provided to and demanded by owners and operators of regional gas networks, and the activities of the joint venture being, at the beginning, limited to offering network services in Germany and the Netherlands. The market definition was left open. 569 See book paragraphs 2.344-2.346.

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Part 3 – Agreements, decisions corrected practices and abuse dominance Chapter 1 – Introduction Lars Kjølbye

Part 3 Agreements, decisions concerted practices and abuse of dominance Articles 101 and 102 TFEU

CHAPTER 1 Introduction 1.

Overview

The objective of Articles 101 and 102 TFEU is to protect competition on the market for the benefit of consumers.570 This objective is achieved by prohibiting conduct that harms consumers directly such as price fixing as well as conduct that harms consumers indirectly by adversely affecting the competitive structure on the market.571 Importantly, the aim of the EU competition rules is not to protect individual competitors or particular groups of market players against competition on the merits. The consumer focus also means that competition policy does not aim at achieving industrial policy goals. However Articles 101 and 102 TFEU play a key role in promoting the creation of an internal energy market which is presumed to benefit consumers. Competition is generally considered to benefit consumers by ensuring cost reflective prices, increasing choice and promoting innovation. Competition policy forms an essential part of the policies of the European Union. This is reflected in protocol 27 to the treaties on the internal market and competi570 See Commission Guidelines on the application of Article 101(3) TFEU, OJ C 101/97 of 27.04.2004, paragraph 13, and Case T-168/01 GlaxoSmithKline [2006) ECR II-2969, paragraph 118. 571 See e.g. Case C-8/08 T-Mobile Nederland ECR 2009, p. I-4529, paragraph 38.

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tion according to which the internal market as set out in Article 3 EU includes a system ensuring that competition is not distorted.572

3.3

3.4

3.5

3.6

Restrictions of competition may result from agreements between economic operators or from unilateral conduct engaged in by such operators having a strong position on the market. When economic operators, jointly or unilaterally, have market power they are able to increase prices and reduce output to the detriment of consumers. They may also be able to exclude their rivals from the market, which by restricting competition may also cause harm to consumers. Measures adopted by Member States may also have a very significant impact on competition and consumer welfare. Indeed, when Member States grant specific firms exclusive rights to supply certain products, competition may be eliminated. Energy is a good example. In the past exclusive rights to supply electricity and gas were common in the EU. This only began to change when the EU adopted directives with a view to liberalising European gas and electricity markets. While most special and exclusive rights granted by Member States to incumbent energy companies have been eliminated some remain and may raise issues under EU competition law.573 In the energy sector liberalisation and enforcement of competition rules have gone hand in hand. The objective of liberalisation is to introduce effective competition in the energy sector. Once legal monopolies have been dismantled and harmonisation and supporting measures have been adopted with a view to creating a functioning internal market, competition policy plays an essential role in terms of ensuring that effective competition becomes a reality. Well functioning energy markets that ensure secure energy supplies at cost reflective prices are of key importance in terms of achieving consumer welfare. Active competition policy enforcement at European and national level is important to foster competition and ensure that consumers have access to energy at affordable prices.574 The introduction of competition in EU gas and electricity markets is an integral part of EU energy policy which is directed at achieving competitiveness, security of supply and sustainability.575 All European consumers, i.e. households, 572 This principle was previously set out in Article 3(1)(g) EC. 573 For a recent example see Commission Decision of 5.3.2008, Case COMP/38.700 – Public Power Corporation concerning rights for the exploration of lignite deposits in Greece. 574 See Commission Communication of 10.11.2010, Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final, p. 14 575 See Commission Communication of 10.11.2010, Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final.

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commercial users and industrial users, heavily depend on the secure and reliable provision of energy at cost reflective prices. The importance of creating a competitive internal energy market has been reiterated by the Commission on numerous occasions. For instance, in the Communication on a Framework Strategy for a Resilient Energy Union the Commission sets out its vision of an integrated continent-wide energy system where energy flows freely across borders, based on competition and the best possible use of resources, and with effective regulation of energy markets at EU level where necessary.576 The Commission explains that an integrated energy market is needed to create more competition, leading to greater market efficiency through better use of resources across the EU and to produce affordable prices for consumers.577 The EU took a significant step towards creating integrated and competitive energy markets when the EU legislator adopted the third gas and electricity liberalisation package on 13 July 2009.578 The third package inter alia strengthens the unbundling requirements to prevent the conflicts of interest that may arise when a firm is at the same time involved in network operations and supply, establishes an agency for the cooperation of national regulators (ACER) to deal more effectively with cross-border issues, and strengthens the powers of national regulators in a number of ways to enhance their ability to monitor markets and address harmful conduct. In the present context it is of particular significance that national regulators obtained new powers to engage in monitoring and ex post control and enforcement.579 These powers resemble those held by the Commission and the national competition authorities, thereby creating a new interface vis-à-vis national energy regulators.580 576 COM (2015) 80 Final. 577 Id., p. 3. 578 The package which consists of three regulations and two directives is available at http://ec.europa.eu/energy/gas_electricity/third_legislative_package_en.htm. 579 See in this respect Article 37 of Directive 2009/72 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ [2009] L 211/55. 580 Unlike Regulation 1/2003 which creates a network of competition authorities, the third package does not provide developed tools for ensuring effective cooperation between regulators and competition authorities. For instance, there is a no legal base for exchanging confidential information between regulators and competition authorities which significantly limits cooperation between them. Thus, there is no provision equivalent to Article 12 of Regulation 1/2003, which empowers the Commission and the national competition authorities to exchange confidential information and use it in evidence. Article 38 of Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/55 of 14.8.2009, provides a legal base for the regulators and ACER to exchange information subject to compliance with the confidentiality obligations in the originating Member State. However, the article does not regulate the use of the information exchanged and does not extend to competition authorities.

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3.8

The third liberalisation package is a good example of the interplay between liberalisation and competition policy. The Commission used a competition inquiry into gas and electricity markets (the Energy Sector Inquiry) to support its call for further liberalisation and pave the way for what became the Third Package.581 At the same time the sector inquiry provided a basis for launching a significant number of competition cases to address the concerns identified by the Commission in the course of the inquiry which in turn provided further support for the Third Package. Given the significance of the Energy Sector Inquiry in terms of shaping the Commission’s competition law enforcement focus in the gas and electricity sectors in recent years, it is useful to recall its main findings and the enforcement actions that the Commission took to address the concerns that it identified.

• 3.9

3.10

Market concentration

According to the Energy Sector Inquiry, wholesale gas trade had been slow to develop, and the incumbents remained dominant on their traditional markets, by largely controlling up-stream gas imports and/or domestic gas production. With little new entry in retail markets, customer choice was limited and competitive pressure constrained. Analysis of trading on power exchanges shows that, in a number of them, generators had scope to exercise market power. In the German Electricity Wholesale Market case the Commission accepted commitments to divest significant generation capacity as a remedy to suspected withdrawal of generation capacity with a view to influencing wholesale market prices.582 The Commission thus addressed conduct that was a direct result of market concentration, namely the exercise of market power. More recently, national competition authorities such as the UK CMA have focused on the potential exercise of market power on retail energy markets.583

• Vertical foreclosure According to the Energy Sector Inquiry new entrants often lacked effective access to networks (in gas, also to storage and to liquefied natural gas terminals) 581 The final report on the Energy Sector Inquiry was adopted on 10 January 2007, see Commission Communication COM (2006) 851 Final. The full report is a technical annex to the Communication taking the form of a DG Competition report on the energy sector inquiry (SEC (2006) 1724). On the same day the Commission adopted a Communication on Prospects for the internal gas and electricity market (COM (2006) 841 Final). 582 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Electricity Wholesale Market. 583 See CMA Energy Market Investigation – Updated issues statement, 18.2.2015: https://assets.digital.cabinet-office.gov.uk/media/54e378a3ed915d0cf7000001/Updated_Issues_Statement.pdf.

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despite unbundling requirements. The operators of the networks/infrastructures were suspected of favouring their own affiliates. According to the Energy Sector Inquiry vertical integration also led to a situation where operational and investment decisions were not taken in the interest of network/infrastructure operations, but on the basis of the supply interests of the integrated company. This concerns – which was closely related to the call for stronger unbundling measures in the context of the third liberalisation package – was at the core of the Commission’s enforcement follow up. In the RWE Gas foreclosure and ENI cases the Commission accepted commitments to divest transmission pipelines as a remedy to suspected capacity hoarding, margin squeeze and strategic underinvestment in pipelines.584 The concerns that vertically integrated energy companies use their networks to foreclose competition persist despite the stronger legal and functional unbundling measures in the Third Package.585

•

Market integration

For gas, available capacity on cross-border import pipelines was limited. According to the Energy Sector Inquiry new entrants were unable to secure transit capacity on key routes and entry capacity into new markets. In electricity, integration was hampered by insufficient interconnector capacity and a lack of adequate incentives to invest in additional capacity to eliminate long-established bottlenecks. This has been another area of activity in terms of the Commission’s enforcement follow up. In the GDF and E.ON gas foreclosure cases the Commission accepted commitments to release significant amounts of capacity at the entry points into the French and German markets, which GDF and E.ON had reserved on a long term basis.586 Finally, in Swedish Interconnectors the Commission accepted commitments to sub-divide the Swedish electricity transmission system into two or more bidding zones and manage congestion in the Swedish transmission system without limiting trading capacity on interconnectors.587 These commitments address the Commission’s concern that the Swedish TSO hindered exports by limiting the interconnection capacity that it made available. Similarly, in Romanian gas interconnectors the Commission intervened against a strategy to restrict the free flow of natural gas from Romania to neighbouring Member States 584 See Commission Decisions of 18.3.2009, Case COMP/39.402 – RWE Gas Foreclosure, and of 29.9.2010, Case COMP/39.315 - ENI. 585 See e.g. Commission press release IP/14/1442 on the opening of a Phase II investigation in Case M.7095 Socar/DEFSA: http://europa.eu/rapid/press-release_IP-14-1442_en.htm. 586 See Commission Decisions of 3.12.2009, Case COMP/39.316 – Gaz de France, and of 4.5.2010. Case COMP/39.317 – E.ON Gas. In 2016 the Commission released E.ON from its commitments because of significant market change since the commitments were offered, see IP-16-2646 – Successful opening of German gas markets allows early termination of E.ON. 587 See Commission Decision of 14.4.2010, Case COMP/ 39.351 – Swedish Interconnectors.

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through e.g. underinvestment or strategic delays in the building of infrastructure relevant for exports, tariffs that made exports commercially unviable and vexatious technical arguments as pretext for restricting exports.588

3.12

3.13

• Downstream markets According to the Energy Sector Inquiry the cumulative effect of long contract durations, contracts with indefinite duration, contracts with tacit renewal clauses and long termination periods can be substantial. The analysis showed that the degree to which the industrial customers were tied to incumbent suppliers on a long-term basis differed significantly between Member States. For gas, restrictions on how customers could dispose of their gas, in combination with restrictive practices by suppliers regarding delivery points, limited competition and prevented the achievement of efficiencies by these customers. The competition concerns relating to long-term contracts with industrial users were initially addressed by the Commission in the Distrigas case, in which the Commission accepted commitments whereby the incumbent gas supplier undertook to reduce the share of the market covered by such contracts and limit their duration.589 Subsequently, in the Long term electricity contracts France the Commission accepted similar commitments regarding supply of electricity to French industrial electricity users.590 • Balancing markets For gas, the Energy Sector Inquiry provided that the small size of balancing zones increased the complexity and costs of shipping gas within Europe. Costs were increased by highly complex and divergent rules in each zone, and by the obligation to reserve capacity at each border point. According to the Energy Sector Inquiry these problems were exacerbated by the time dimension: the shorter the balancing period, the higher the risk of imbalance for the supplier. These various elements created major obstacles for new suppliers to enter the market, which the vertically integrated incumbents had little incentive to remove. Furthermore, balancing charges, clearing costs and penalty charges were not transparent and often contained unjustified penalty charges, favouring incumbents. In electricity, the markets on which transmission system operators had to acquire balancing and reserve energy were highly concentrated, which according to the Energy 588 See Commission Communication of 25.9.2018 published pursuant to Article 27(4) of Council Regulation (EC) No 1/2003 in Case AT.40335 – Romanian gas interconnectors. 589 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. 590 See Commission Decision of 17.3.2010, Case COMP/ 39.386 – Long-term contracts France.

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Sector Inquiry gave generators scope for exercising market power. In the German Electricity Balancing Market case the Commission accepted a commitment by the incumbent to divest its electricity transmission network.591 The commitments were offered to address the Commission’s concerns that the incumbent’s TSO affiliate had favoured its own production affiliate by inflating its balancing costs and preventing power producers from other Member States from exporting balancing energy into the incumbents’s balancing markets. Active competition law enforcement at European and national levels remains important to foster competition and ensure that consumers have access to energy at affordable prices.592 Enforcement in the energy sector remains a priority for the Commission and the national competition authorities.593 Regulation 1/2003 on the implementation of the Treaty rules on competition594 has created a framework for close cooperation between the competition authorities in the EU. This means that an effective framework exists for ensuring that the Commission and Member State competition authorities maximise the overall impact of their enforcement actions. The national competition authorities and the Commission can assist each other in the collection of evidence and have the power to exchange confidential information and use it in evidence for the purpose of applying Articles 101 and 102 TFEU. They inform each other of new cases and have entered into a practical work sharing arrangement whereby cases are dealt with by authorities that are well placed to do so.595 Member State competition authorities are generally well placed to deal with cases involving a single or a limited number of Member States whereas the Commission is particularly well placed to deal with cases involving three or more Member States or cases where there is a Community interest in setting a precedent. However, in the energy sector where relevant markets tend to be national in scope, the Commission has taken action in a number of cases that do not extend beyond a single Member State because of the nexus with the regulatory agenda and the overarching objective of creating an internal energy market, confirming the fact that the network created by Regulation 1/2003 is based on practical work sharing and not rigid rules of competence. In energy markets national regulators also 591 See Case COMP/39.388 – German Electricity Balancing Market. 592 See Commission Communication of 10.11.2010, Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final, p. 14 593 The creation of a European Energy Union is a Commission priority: http://ec.europa.eu/priorities/energyunion/index_en.htm. The Energy Union means making energy more secure, affordable and sustainable. 594 See OJ [2003] L 1/1. 595 See Commission Notice on co-operation within the Network of Competition Authorities, OJ [2004] C 101/43, paragraphs 9-15.

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play an important role and this role has been increased by the third liberalisation package. As a result, there is an increasing need for close cooperation between regulators and competition authorities. At present, however, the absence of common rules providing for inter alia the right to exchange confidential information creates obstacles to such cooperation.596 This lacuna is not addressed by the Third Package.

3.16

From a competition law enforcement perspective the European energy industry does not differ from other European industries. The same competition rules apply597. These rules are sufficiently flexible to take into account the specificities of individual markets. The following chapters will deal with the most common restrictions of competition that are arguably typical for the European electricity, gas and petroleum industry. A particular focus will be placed on cases in the electricity and gas sectors. However, by way of introduction it is useful to briefly recall the basic framework of Articles 101 and 102 FEU.

2. 3.17

The basic requirements of Articles 101 and 102

Article 101 of the FEU Treaty, concerning agreements that are restrictive of competition, provides as follows: “1.

The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertak‑ ings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or dis‑ tortion of competition within the common market, and in particular those which: (a) (b) (c) (d)

directly or indirectly fix purchase or selling prices or any other trading conditions; limit or control production, markets, technical development, or in‑ vestment; share markets or sources of supply; apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

596 Commission Communication on Prospects for the internal gas and electricity market (COM (2006) 841 Final, contains various ideas for enhancing co-operation between national regulators so as to close the gap that currently exists for cross-border issues. 597 This was confirmed by the Court of Justice already very early, see Case 6/64 Costa vs Enel [1964] ECR 1251.

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(e)

make the conclusion of contracts subject to acceptance by the other par‑ ties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such con‑ tracts.

2.

Any agreements or decisions prohibited pursuant to this article shall be auto‑ matically void.598

3.

The provisions of paragraph 1 may, however, be declared inapplicable in the case of: •

any agreement or category of agreements between undertakings,

•

any decision or category of decisions by associations of undertakings,

•

any concerted practice or category of concerted practices, which con‑ tributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) (b)

impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; afford such undertakings the possibility of eliminating compe‑ tition in respect of a substantial part of the products in ques‑ tion.”

Thus, in order for the prohibition of Article 101(1) to apply, four conditions must be satisfied: (1)

there must be an agreement or concerted practice;599

(2)

concluded between undertakings;

(3)

resulting in (an appreciable)600 restriction of competition, and

(4)

capable of affecting trade between Member States.

598 Moreover, fines may be imposed on firms entering into such arrangements either intentionally or negligently. See article 23(2) Reg. 1/2003, Appendix 2. 599 In the following the term “agreements” encompasses the term “concerted practices”. 600 See below, book paragraph 3.31.

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3.19

Chapters 2 and 3 examine horizontal agreements, i.e. agreements between companies operating at the same level of the supply chain and vertical agreements, i.e. agreements between companies operating at different levels of the supply chain. These chapters deal only with the third requirement of Article 101(1) (restriction of competition) and the efficiency defence of Article 101(3). The other condition for applying Article 101(1) FEU (agreement, undertakings, effect on trade) are outside the scope of this book, being generic concepts common to agreements in all sectors. More detailed information on these issues can be found in the more general works on Community competition law.601 However, as an introduction the basic conditions for applying Article 101 are summarised in the following.

3.20

The terms “agreement”, “ decision by associations of undertakings” or “concerted practice” are interpreted widely to catch all forms of co-ordination of market conduct between economic operators. In essence, there must be a concurrence of wills of at least two parties as regards their conduct on the market. Article 101 thus applies to coordinated (as opposed to unilateral) market conduct. An agreement may be written or oral; explicit or tacit. A concerted practice is a less developed form of collusion. However, the distinguishing feature remains the same, namely that there is a meeting of minds as regards the market conduct to be engaged in by at least one of the parties.602

3.21

The concept of undertaking encompasses any entity exercising an economic activity, irrespective of the legal form of the entity, its financing or its profit or non-profit aim. As long as it is active on the market as an economic operator, the entity is regarded as an undertaking for the purposes of Articles 101 and 102.603 According to settled case law it is the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity. Whether a purchasing activity constitutes an economic activity thus depends on the subsequent use of the purchased product.604

3.22

The concept of undertaking is an autonomous concept of EU law. It does not depend on national corporate law. This means that the legal form of undertaking is irrelevant. The concept of undertaking can include private firms 601 See, for example, Richard Whish, Competition Law, Oxford University Press 2003, Faull and Nikpay, The EC Law of Competition, Oxford University Press 2007, second edition, or Bellamy and Child, European Community law of competition, Sweet & Maxwell. 602 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraphs 14 and 15. 603 Case C-41/90, Höfner v. Macrotron, ECR 1991, p. I-1979. 604 See Case C-205/03, FENIN, ECR 2006, p. I-6295, paragraphs 25 and 26.

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and corporations or public entities, such as state controlled utility companies. An entity forming part of the public administration is also an undertaking for the purposes of EU competition law provided that it carries out an economic activity.605 This means that a TSO run by a public administration is an undertaking for the purpose of the EU competition rules.606 The concept of undertaking encompasses all economic activities exercised under the control of the same persons or shareholders. In fact, the same undertaking may encompass a multitude of corporations belonging to the same group or concern. As a rule, such a group is seen as one undertaking. This finding has practical relevance in three respects. First, when calculating market share or turnover of an undertaking, reference must be made to group results. Second, agreements concluded between entities belonging to the same undertaking are not caught by Article 101(1).607 The conduct of a single undertaking is subject only to Article 102. Third, a parent company is liable for the conduct engaged in by subsidiaries that do not determine their own conduct on the market. In the case of wholly owned subsidiaries there is a presumption that the parent company determines the subsidiaries’ market conduct and that as a result it is liable for their anti-competitive conduct.608 The requirement that the agreement must be capable of affecting trade between Member States is a jurisdictional criterion, which determines the scope of application of Articles 101 and 102. Agreements and abusive conduct that is not capable of affecting trade between Member States is subject only to Member State competition law. The Court of Justice has given a wide interpretation to the effect on trade concept, holding that ‘‘ it must be possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or fact that the agreement or practice may have an influence, direct or indirect, actual or potential, on the pattern of trade between Member States.’’ If the agreement covers at least the territory of a whole Member State there is generally a strong presumption that it is capable of affecting trade between Member States.609 The case law also requires that the effect on trade is appreciable. In a notice, which codifies and explains the relevant case law, the Commission has developed a threshold below which it is presumed that the agreement is not capable of appreciably affecting trade between Member States. For this presumption to apply two cumulative conditions must be satisfied: the turnover of the undertakings 605 606 607 608 609

See Case 18/88 RTT v GB-INNO ECR 1991, p. 5941 See in this respect Commission Decision of 14.4.2010, Case COMP/39.351 – Swedish Interconnectors. See Case C-73/95 P, Viho, ECR 1996, p. I-5457. See Case C-97/08 P, Akzo Nobel, ECR 2009, p. I-8237, paragraphs 58-60. See Joined Cases C-125/07 P a.o., Erste Group Bank, ECR 2009, p. I-8681, paragraphs 38 and 39.

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in the products covered by the agreement must not exceed € 40 million and their market share must not exceed 5% of the relevant market.610

3.25

The concept of restriction of competition contained in Article 101(1) will be dealt with in detail in subsequent chapters. However, it is useful already here to recall some of the core principles, which are common to horizontal and vertical agreements.

3.26

The concept of restriction of competition has evolved substantially in recent year from a form-based approach whereby restrictions on commercial freedom of conduct were equated with restrictions of competition and to a more effects-based approach according to which the objective of Article 101(1) is to protect competition on the market for the benefit of consumers.611 This means that in most cases Article 101(1) only applies if the agreement is likely to produce adverse effects on competition and consumers. The exception is agreements that have as their object to restrict competition. This approach has led to a narrowing of the scope of the prohibition of Article 101(1).612 Some restrictions, referred to as restrictions by object, are deemed to be restrictive of competition without any need to analyse their negative effects on competition and consumers.613 It is presumed that such restrictions have effects that are contrary to Article 101(1). Cartels and destination clauses preventing resale are examples. The concept of restriction by object is interpreted restrictively, catching only certain types of coordination between undertakings which reveal a sufficient degree of harm to competition.614 If an agreement is not restrictive of competition by object it must be examined whether it has restrictive effects on competition. Account must be taken of both actual and potential effects.

3.27

610 See Commission, Guidelines on the Effect of Trade Concept contained in Articles 101 and 102 (Guidelines on the Effect of Trade), OJ C 101/81 of 27.4.2004. 611 See Case T-168/01, GlaxoSmithKline, ECR 2006, p. II-2969, paragraph 118 612 Recent judgments might suggest that the European Courts have yet to sanction fully this consumer welfare oriented approach to the concept of restriction of competition, see e.g. Case C-8/08, T-Mobile Nederland, ECR 2009, p. I-4529, paragraph 38, where the Court held that Article 101 FEU, like the other competition rules of the Treaty, is designed to protect not only the immediate interests of individual competitors or consumers but also to protect the structure of the market and thus competition as such. However, since it is clear that the EU competition rules aim at protecting competition the judgment may also be interpreted as merely stressing the fact that consumers may be harmed directly and indirectly by anticompetitive conduct and that indirect harm occurs when the conduct adversely affects the competitive structure since it may allow undertakings to exercise market power. 613 Case C-8/08, T-Mobile Nederland, ECR 2009, p. I-4529, paragraph 31. 614 See e.g. Case C-345/14 SIA 150 Maxima Latvia – ECLI:EU:C:2015:784, paragraph. 18.

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In the case of restrictions of competition by effect there is no presumption of anti-competitive effects. For an agreement to be restrictive by effect it must affect actual or potential competition to such an extent that on the relevant market negative effects on prices, output, innovation or the variety or quality of goods and services can be expected with a reasonable degree of probability.615 Negative effects on competition within the relevant market are likely to occur when the parties individually or jointly have or obtain some degree of market power and the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.616 Market power is the ability to maintain prices above competitive levels for a significant period of time or to maintain output in terms of product quantities, product quality and variety or innovation below competitive levels for a significant period of time.

3.28

The restriction must also be appreciable. However, when an agreement that is capable of appreciably affecting trade between Member States has an anticompetitive object, appreciable effects on competition are presumed.617 The Commission has in a notice indicated on the basis of market shares when an agreement can normally be presumed to not appreciably restrict competition.618 A distinction is made between agreements between competitors and agreements between noncompetitors. For the first category, agreements between undertakings with an aggregate market share not exceeding 10% on any of the relevant markets affected by the agreement are deemed not to infringe Article 101(1). They are considered to be “ de minimis”. For the second category the relevant threshold is 15%. As already mentioned, the thresholds indicate when agreements are not capable of appreciably restricting competition. They do not indicate when an appreciable restriction is likely to be present. Since in practice the finding of a restriction of competition by effect requires a detailed market analysis and a finding of likely negative effects on competition and consumers, it is likely that the thresholds will be higher than the 10% and 15% thresholds laid down in the notice. For restrictions by object there is no need to take account of the concrete effects of an agreement since they are presumed to be appreciable.619 However, such agreements must still be capable of appreciably affecting trade between Member States.

3.29

615 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 24. It is not sufficient in itself that the agreement restricts the freedom of action of one or more of the parties, see Case T-112/99, Métropole télévision (M6) and others, ECR 2001, p. II-2459 paragraphs 76 and 77. 616 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 25. 617 See Case C-226/11, Expedia, ECR 2012, p. I-0000, paragraphs 35 to 37. 618 See Commission, Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) TFEU (de minimis Notice), OJ C 291/1, 30.8.2014, paragraph 8. 619 See Case C-226/11, Expedia, ECR 2012, p. I-0000, paragraphs 35 to 37.

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3.30

Article 101(1) applies to restrictions of inter-brand competition, i.e. competition between products from different suppliers, and to restrictions of intrabrand competition, i.e. competition between distributors of products sourced from the same supplier. This is reflected in the counterfactual, which is used in the assessment of whether an agreement has likely negative effects on competition. This counterfactual is set out in paragraph 18 of the Commission’s guidelines on the application of Article 101(3)620 which provides that ‘‘ for the purpose of assessing whether an agreement or its individual parts may restrict inter-brand competition and/or intra-brand competition it needs to be considered how and to what extent the agreement affects or is likely to affect competition on the market.” The following two questions provide a useful framework for making this assessment. The first question relates to the impact of the agreement on inter-brand competition while the second question relates to the impact of the agreement on intra-brand competition.

3.31

The first question asks whether the agreement restrict actual or potential competition that would have existed without the agreement. If so, the agreement may be caught by Article 101 (1). In making this assessment it is necessary to take into account competition between the parties and competition from third parties. For instance, where two undertakings established in different Member States, which produce competing products, undertake not to sell products in each other’s home markets, (potential) competition that existed prior to the agreement is restricted.621 Similarly, where a supplier imposes obligations on its distributors not to sell competing products and these obligations foreclose competing suppliers, actual or potential competition that would have existed in the absence of the agreement is restricted.

3.32

The second question asks whether the agreement restrict actual or potential competition that would have existed in the absence of contractual restraint(s). If so, the agreement may be caught by Article 101(1). For instance, where a supplier restricts its distributors from competing with each other, (potential) competition that could have existed between the distributors absent the restraints is restricted. Such restrictions include resale price maintenance and territorial or customer sales restrictions between distributors. However, a contractual re620 See OJ 2004 C101/ 97 of 27.04.2004. 621 In assessing whether the parties to an agreement are actual or potential competitors the economic and legal context must be taken into account. For instance, if due to the financial risks involved and the technical capabilities of the parties it is unlikely on the basis of objective factors that each party would be able to carry out on its own the activities covered by the agreement the parties are deemed to be non-competitors in respect of that activity. It is for the parties to bring forward evidence to that effect. See in this respect e.g. Commission Decision in Elopak/Metal Box – Odin, OJ 1990 L 209, p. 15, and in TPS, OJ 1999 L 90, p. 6.

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straint may in certain cases not be caught by Article 101(1) when it is objectively necessary for the existence of an agreement of that type or that nature.622 If absent a restraint the agreement would not have been concluded, there is no intra-brand competition to be restricted and Article 101(1) does not apply. The philosophy is simple. Vertical agreements may restrict competition that is made possible by the agreement. However, since it is the agreement that makes competition possible, no restriction of competition can arise if absent the contractual restraint no agreement would have been concluded. This illustrates the fundamental difference between intra-brand competition and inter-brand competition. Inter-brand competition exists absent the agreement whereas inter-brand competition does not. Article 101(3) explicitly recognises that not all restrictive agreements are harmful. Restrictive agreements may generate economic benefits that outweigh the adverse effects of the restriction on consumers. This is true both for agreements that have as their object to restrict competition and for agreements that have restrictive effects on competition. Restrictive agreements may for instance allow the parties to reduce costs or improve the quality of their goods and services. By enabling such benefits to be taken into account, Article 101(3) creates an efficiency defence that may allow agreements to escape the prohibition of Article 101(1) and nullity provided for in Article 101(2). If only parts of an agreement are null and void under Article 101(2), the automatic nullity generally applies only to those parts, provided that such parts are severable from the agreement as a whole. However, it is for the applicable national law to determine the consequences of partial nullity for the remaining part of the agreement.623

3.33

In order to benefit from the exception of Article 101(3), the agreement must satisfy four cumulative and exhaustive conditions:

3.34

(1)

The agreement must create objective economic benefits;

(2)

The restrictions must be indispensable to achieve the benefits;

(3)

Consumers must receive a fair share of the benefits; and

(4)

The agreement must not allow the parties to eliminate competition on the market concerned.

622 See in this respect Case 56/65, Société Technique Minière, ECR 1966, p. 337, and Case 258/78 Nungesser, ECR 1982, p. 2015. 623 See Case 56/65, Société Technique Minière, ECR 1966, p. 337.

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3.35

The Commission has published guidelines, which explain how this efficiency defence should be applied in practice.624 The Guidelines have deliberately laid down more rigorous conditions for applying Article 101(3) to match the corresponding narrowing of Article 101(1). Previously a wide application of Article 101(3) was required in order to ‘save’ the great many agreements that should not have been caught by Article 101(1) in the first place. Under the more effects based approach, absent a restriction by object, Article 101(1) only applies to agreements that create genuine competition concerns due to their likely adverse effects on the market. As a consequence, restrictive agreements only escape prohibition when it has been convincingly demonstrated that they create genuine countervailing benefits. Most agreements escape Article 101(1) but those that are caught are subject to rigorous scrutiny under Article 101(3).

3.36

The assessment of restrictive agreements under Article 101(3) (and Article 101(1)) is made within the actual context in which they occur and on the basis of the facts existing at any given point in time.625 The assessment is sensitive to material changes in the facts. The exception rule of Article 101(3) applies as long as the four conditions are satisfied and ceases to apply when that is no longer the case. When applying Article 101(3) in accordance with these principles it is necessary to take into account the initial sunk investments made by any of the parties and the time needed and the restraints required to commit and recoup an efficiency enhancing investment. Article 101 cannot be applied without taking due account of such ex ante investment. The risk facing the parties and the sunk investment that must be committed to implement the agreement can thus lead to the agreement falling outside Article 101(1) or fulfilling the conditions of Article 101(3), as the case may be, for the period of time required to recoup the investment. This is of significant importance in the energy sector where operators often have to make significant investments and where cooperation arrangements may be a way to shoulder such large investments and the accompanying risks.

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Article 101(3) can be applied in individual cases and by way of block exemptions that apply the exception rule to categories of agreements. The Commission has adopted a number of such block exemption regulations. If an agreement meets the requirements of a block exemption regulation, it is presumed to be legal unless a competition authority expressly withdraws the benefit of the exemption. The Commission may withdraw the benefit of a block exemption for 624 See in particular the Guidelines on the application of Article 101(3), OJ 2004 C101/97 of 27.04.2004. 625 Guidelines on the application of Article 101(3), paragraph 44, and Case C-238/05, Asnef-Equifax, ECR 2006, p. I-11125, paragraph 49.

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the whole of the EU, whereas Member State competition authorities have the power to withdraw the benefit of a block exemption for their own territory on condition that the relevant geographic market does not extend beyond the territory of the Member State in question626. The withdrawal of a block exemption is a rare occurrence. Many if not most agreements covered by a block exemption regulation are not caught by Article 101(1) in the first place for lack of likely negative effects on competition and consumers. Article 102 of the Treaty on the Functioning of the European Union prohibits abuse of dominance. As is clear from the Commission’s recent enforcement practice following its Energy Sector Inquiry, Article 102 is highly relevant to undertakings in the energy sector. This provision provides as follows:

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“Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) (b) (c) (d)

directly or indirectly imposing unfair purchase or selling prices or other un‑ fair trading conditions; limiting production, markets or technical development to the prejudice of consumers; applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

A number of conditions must thus be satisfied for Article 102 to apply: –

an abuse,

–

of a dominant position,

–

by one or more undertakings,

–

which affects trade between Member States.

626 See Article 29 of Regulation 1/2003, Appendix 2.

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In Chapter 4, a detailed analysis is made of dominance and abuse with respect to energy markets, again focussing in particular on the electricity and gas sectors. The indications regarding the terms “undertakings” and “affect on trade” made above, are also relevant here.

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Although the development has been less pronounced than in the field of Article 101, the application of Article 102 has also become more effects-based. This development is reflected in the Commission’s 2008 Guidance on its enforcement priorities in applying Article 102 TFEU to abusive exclusionary conduct by dominant undertakings and the recent judgment of the European Court of Justice in Intel.627

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In its Guidance Paper the Commission sets out the principles that it relies on when determining whether or not to give priority to a potential abuse of dominance case. While the Commission expressly states that the Guidance is not intended to state the law,628 it nevertheless establishes a useful framework for analysing Article 102 cases. Two elements merit particular mention. First, the Commission states that it will normally intervene under Article 102 where, on the basis of cogent and convincing evidence, the allegedly abusive conduct is likely to lead to anti-competitive foreclosure.629 Second, the Commission makes clear that it will analyse efficiencies in much the same was as it does under Article 101(3).630 Dominant firms may thus in principle avoid a finding of abuse if the likely anticompetitive effects are outweighed by pro-competitive efficiency benefits. However, as is clear from its recent case practice, the Commission is only cautiously embracing the effects-based approach in the field of Article 102.631 The Commission tends to argue its cases first on the basis of the traditional more legalistic approach and only then argue that in addition there are likely negative effects on competition and consumers. Recent case law embraces the need to consider competitive effects. In Intel the European Court of Justice made clear that Article 102 targets practices that have an exclusionary effect on as-efficient competitors. The Commission is required to consider all relevant circumstances including the share of the market covered by the challenged practice, the conditions and arrangements imposed by the dominant firm and the existence of any strategy aiming to exclude as-efficient competitors.632 627 OJ 2009 of 24.2.2009, C 45/7 and Case C-413/14 P Intel ECLI:EU:C:2017:632. The Guidance Paper does not deal with exploitative abuses such a discrimination or unfair pricing. 628 See Guidance Paper, paragraph 3. 629 Id., paragraph 20. 630 Id., paragraphs 28-31. See also Case C-209/10, Post Denmark, 2012 ECR page I-0000, paragraphs 41 and 42. 631 See e.g. Commission Decision of 13.5.2009, Case COMP/37.990 – Intel. 632 Case C-413/14 P Intel ECLI:EU:C:2017:632, paras. 133-134.

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CHAPTER 2 Horizontal agreements 1.

Introduction

Horizontal agreements are arrangements entered into by undertakings operating at the same level of trade. Such agreements are generally633 only capable of restricting competition when they are concluded by undertakings that are actual or potential competitors. The following sections deals with various horizontal arrangements which are in principle capable of restricting competition and which are of relevance to the energy sector. However before dealing with these categories of agreements, it is useful to clarify the concept of actual or potential competitors.

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Two parties are deemed to be competitors when they supply products that in the eyes of consumers are substitutable. Actual competitors are suppliers that are active on the same product market in the same geographical area. In addition, suppliers that have not yet entered the market may be considered actual competitors when – despite the fact that currently they are not active on the same product and geographic market – they impose an actual competitive constraint on the existing operators. These are suppliers that in response to a small and permanent increase in relative prices are able and likely to switch production in the very short term without incurring significant additional costs or risks to the relevant products and/or geographical area and offer their products to customers (so-called immediate supply-side substitutability). For instance, a manufacturer of goods, which generates electricity for its own requirements, may in reaction to an increase in the electricity price start selling electricity. Such generators that

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633 In rare cases horizontal agreements may give rise to foreclosure concerns. This may e.g. be the case where parties to a horizontal agreement agree not to deal with third parties. This type of arrangement is often referred to as a collective boycott.

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could start supplying the market in response to a small but nevertheless significant increase in prices are counted as actual competitors, although they are currently not serving the market.

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The difference between this latter group of actual competitors and potential competitors is the time they need and the costs they incur to enter the market in question in order to offer customers an alternative. Potential competitors require more time and investment to enter the market than actual competitors with flexible supply capacities. For an operator to be considered a potential competitor it must be likely to enter the market within a short period of time in response to a small and permanent increase in relative prices. What constitutes a ‘short period of time’ depends on the facts of the case at hand, its legal and economic context, and, in particular, on whether the company in question is a party to the agreement or a third party. In the case of a party to the agreement the Commission takes the view that a longer period should normally be considered to be a ‘short period of time’ than where the capacity of a third party to act as a competitive constraint on the parties to an agreement is analysed. In relation to the parties, Article 1(1)(n) of the Specialisation block exemption Regulation provides that there must realistic grounds to consider that entry would take place within not more than three years.634 For a third party to be considered a potential competitor, market entry would need to take place sufficiently fast so that the threat of potential entry is a constraint on the parties’ and other market participants’ behaviour.635 No time frame is indicated but given the logic of the Guidelines, it is presumably significantly shorter than three years.

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A horizontal agreement between actual or potential competitors normally affects competition on the market where the business activity, which is the object of the arrangement, is carried out. A price-fixing agreement, for instance, directly affects price competition for the product or service, which is the object of the arrangement. However, restrictions may also occur on markets downstream, upstream, neighbouring or otherwise related to the business activity covered by the agreement. 634 OJ 2010 L335/43 of 18.12.2010. 635 See footnote 5 of Horizontal co-operation guidelines, Appendix 3. The distinction between the parties to the agreement and third parties implies that the Commission will more readily consider the parties potential competitors. This distinction is not explained but is presumably based on the view that a competitive constraint is only effective if it has prevented the parties from exercising market power. It is not sufficient that it might do so some time in the future since consumers will be harmed in the mean time. As regards the parties the concern is a different one, namely that they will restrict competition that would otherwise have occurred, which includes realistic future competition.

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Traditionally, competition authorities have adopted a strict approach to horizontal agreements between competitors. One reason is that in horizontal relationships the exercise of market power by one firm, e.g. by increasing prices, may benefit its competitors. This fact provides an incentive for competitors to collude and engage in anti-competitive behaviour, which produces immediate consumer harm. Horizontal agreements may affect competition because of restrictions contained in the agreement. For instance, the parties may agree on the price that they charge or where they sell their products. The agreement may also contain non-compete obligations that prevent one or more parties from engaging in competing activities during or after the term of the agreement.636

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The agreement may also restrict competition because it reduces the parties’ incentives to compete. For instance, the agreement may lead to the disclosure of strategic information thereby increasing the likelihood of coordination among the parties or it may lead to a significant commonality of costs which in turn may facilitate the coordination of prices and output.637 When parties have similar cost structures it is generally easier to come to a common understanding on what constitutes mutually beneficial market conduct. However, horizontal agreements may also produce a number of benefits by allowing the parties to reduce costs or produce better products compared to what they would have been able to do on their own. Indeed, many horizontal agreements are innocuous or even pro-competitive. When competitors co-operate in order to jointly enter a new market, launch a new product or service or carry out a specific project or activity, which they could not independently bring about, the agreement is not caught by Article 101(1) in the first place if it does not restrict any competition that would have occurred in the absence of the agreement638. Moreover, co-operation agreements that do restrict competition may be compatible with Article 101 as a whole despite their negative effects on competition when they also generate economic benefits that outweigh their adverse effect on consumers (efficiency defence). In these circumstances the exception rule of Article 101(3) may be satisfied.

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636 See e.g. Commission Decision of 18.6.2012, Case COMP/39.736 – Siemens/Areva. 637 See Horizontal co-operation guidelines, paragraph 35, Appendix 3. 638 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 18(a).

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The Specialisation block exemption Regulation639 and the Horizontal co-operation guidelines the Commission distinguishes three categories of agreements, namely agreement that have restrictive effects on competition agreements that have as their object to restrict competition and finally a subset of the latter agreements containing so-called hard-core restrictions.640 The efficiency defence of Article 101(3) is relevant to the first two categories,641 the difference being that in the case of restrictions by object the party invoking the benefit of Article 101(3) is obliged to present a credible efficiency defence before the party invoking Article 101(1) is obliged to show likely effects on competition. Restrictions by object are presumed to restrict competition. In the case of hard-core restrictions that it can normally be presumed that there are negative effects on competition and consumers, which are not outweighed by efficiency gains. Hardcore restrictions are naked restrictions on competition between competitors such as price fixing, output restrictions and market sharing which have no reasonable link with any underlying integration of economic activity, having the potential of generating efficiencies that in turn may benefit consumers. The clearest example is cartels that have as their sole object to restrict competition and thus do not provide for any integration of economic activity.642

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A finding that undertakings have entered in to an agreement to restrict competition requires proof that the conduct of the undertakings concerned is the result of collusion and not their independent individual decisions. Unilateral conduct may be subject to Article 102 but is not caught by Article 101. For this latter provision to apply there must be direct or indirect contacts between operators, the object of which is to influence the conduct on the market of a rival or to disclose to such rival the course of conduct, which the operator itself has decided to adopt or contemplates adopting on the market.643 It is not sufficient to merely point to the fact that prices have been increased in parallel by a similar amount unless there is no other plausible explanation for such conduct than price fixing.644 Competition law does not deprive economic operators of 639 Article 4, OJ 2010 L335/43 of 18.12.2010. 640 It is submitted that the Horizontal co-operation guidelines depart from the line taken by the Commission in the Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004. These latter guidelines seemed not to distinguish hard-core restrictions and restrictions by object. 641 See Horizontal co-operation guidelines, paragraph 48, Appendix 3. 642 According to paragraph 60 of the Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, efficiencies generally stem from an integration of economic activities whereby undertakings combine their assets to achieve what they could not achieve as efficiently on their own or whereby they entrust another undertaking with tasks that can be performed more efficiently by that other undertaking. 643 See Case T-25/1995 a.o., Cimenteries CBR, ECR 2000, p. II-491, paragraph 1849-1852. 644 See Joined Cases C-89/85 a.o., Wood Pulp (II), ECR 1993, p. I-1307. At times, competition authorities have gone quite far in excluding alternative explanations. For instance, in a 2008 decision involving the Greek

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the right to adapt themselves intelligently to the existing or anticipated conduct of their competitors.645 Parallel conduct may be the result of the conditions of competition in a particular market, e.g. the nature of the products, the size and number of suppliers and the entry barriers. Where there exists, for instance, a limited number of suppliers on a market for a homogeneous product parallel pricing may be explained by a phenomenon called “conscious parallelism” or “tacit collusion”.646 This means that each firm is aware that its market behaviour will affect the other sellers and their market behaviour. As a result, each firm will take the expected actions and reactions from the other players into account before determining its own strategy.647 Three conditions must generally be satisfied for a market to be conducive to conscious parallelism.648 First, the market must be sufficiently transparent for the undertakings which coordinate their conduct to be able to monitor sufficiently whether the rules of coordination are being observed. Second, the discipline requires that there be a form of deterrent mechanism in the event of deviant conduct. Third, the reactions of undertakings which do not participate in the coordination, such as current or future competitors, and also the reactions of customers, should not be able to jeopardise the results expected from the coordination.

645 646

647 648

petrol market, the Greek NCA found that the two leading petrol suppliers used their strong brand names to align their wholesale prices. There was no written proof of coordination but the NCA concluded that the only plausible explanation of the alignment of prices was the existence of a concerted practice. This conclusion was based on the fact that the two companies concerned allegedly applied a common discount policy by dividing the domestic market into regions: in some regions, Shell would offer discounts 50% above BP s discounts in those same regions, whereas in other regions it was the other way around, with the result that their net wholesale prices were equalized across the market. Price alignment could not be justified by market transparency, as discounts offered by wholesalers to retailers were not announced publicly. The strong brand name of the two players differentiated them from the rest of domestic players, because the only competitive threat for each of the two companies was the other. The two companies priced systematically higher than their rivals and their market shares consistently converged over the investigated period. It is not clear to the author that these factors support the conclusions drawn in the decision. See Joined Cases 40/73 a.o., Suiker Unie, ECR 1975, p. 1663, paragraphs 4 and 5. See in this respect judgment of the cour d’appel de Paris of 9.12.2003, annulling the French competition authority s decision in Case 3-D-17 concerning an exchange of retail price information between petrol stations operated by ESSO, Shell and Total. The operators of the stations informed each other of the prices charged at the pump, which the French competition authority considered to infringe competition rules. In annulling the decision, the court pointed inter alia to the transparent nature of petrol distribution markets which led to parallel and interdependent conduct. Hence, price formation was due mainly to the inherent characteristics of the market and not the information exchange. Given the explicit exchange of price information it is doubtful that the outcome at European level would have been the same, see in this respect Case C-8/08, T-Mobile Nederland, ECR 2009, p. I-4529. See footnote 29 of Guidelines on horizontal mergers, Appendix 7. See Case T-342/99, Airtours, ECR 2002, p. II-2585, paragraph 62, Case T-464/04, Impala, ECR 2006, p. II-2289, paragraph 247, and Case C-413/06, Bertelsmann and SONY, ECR 2008, p. I-4951, paragraph 123.

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The fact that the pricing behaviour of a small group of suppliers can sometimes be explained by the conditions on the market concerned can be illustrated by surveys of price developments within the former English and Welsh electricity pool which showed that the parallel price movements of the participating electricity generators were a consequence of high supply concentration, market transparency, the homogeneity of the product, the rigid regulation of the pool, which did not allow bilateral sales outside the pool and the low flexibility of demand.649 In other words, generators did not need to expressly fix prices. They could achieve a similar result by adopting an economically rational strategy of conscious parallelism which due to the absence of explicit collusion was not caught by Article 101(1).650 The electricity pool for England and Wales was subsequently replaced by a much more open and less transparent market arrangement allowing transactions over the power exchange as well as through bilateral sales contracts. Another illustrative example of the consequences of (an artificially) high degree of market transparency is the Danish cement sector.651 In October 1993 the Danish Competition Authority began collecting and publishing information on firm-specific actual transaction prices, i.e. list prices less discounts. During the first six months of 1994 prices rose by almost 20% and price differences among suppliers were virtually eliminated. The example shows that public authorities have to think twice before artificially increasing market transparency. The Third Package is promoting market transparency in various respects. It is not given that enhancing transparency promotes competition.652

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If undertakings in a concentrated market agree to exchange commercially sensitive information that facilitates tacit collusion, such agreement may be caught by Article 101(1) either as a restriction by object or effect.653 The Commission’s Horizontal cooperation guidelines contain a chapter on the assessment of information exchange under Article 101 and this is an area of increasing enforcement focus at both European and national level. Technological advances are raising concern that pricing algorithms enable undertakings to exchange information and more effectively monitor pricing behaviour.654 649 See A European Market for Electricity? (R. Vaitilingam ed.) 1999, p. 93-102. 650 However, undertakings that engage in tacit collusion may be held to have abused a collective dominant position contrary to Article 102, see e.g. Joined Cases C-395/95 and C-396/95, Compagnie maritime belge, ECR 2000, p. I-1365. 651 See Church & Ware, Industrial Organisation – A Strategic Approach, McGraw-Hill, 2000, p. 341f. 652 See in this respect Article 40 of Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/55 of 14.8.2009. 653 See Case C-7/95 P, John Deere, ECR 1998, p. I-3111 and Horizontal co-operation guidelines, Appendix 3, Chapter 2. 654 See e.g. OECD paper on Algorithms and Collusion, 9 June 2017. The emergence of intelligent algorithms does not affect the legal test under Article 101(1) TFEU. There must be evidence of collusion between

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Information exchange is relevant to all forms of cooperation agreements. The parties will need to exchange a certain amount of information for their cooperation to function properly. Such ancillary exchanges that are necessary for the agreement to function are assessed together with the other elements of the cooperation. This means that the information exchange does not need to generate separate benefits in order to Article 101(3) to apply.655 In the case of non-ancillary exchanges, the information exchange must generate efficiencies that are necessary to outweigh any restrictive effects. Most information exchanges are caught by Article 101(1) only when they have likely appreciable adverse effects on competition. The main exception is where competitors inform each other of their intentions concerning future pricing, output or sales.656 Such exchanges are considered restrictions by object and are liable to be treated as hard-core cartels. Even a single meeting in which competitors exchange commercially sensitive information may be considered to have as its object to restrict competition.657 In T-Mobile Netherlands the Court of Justice took the view that an exchange of information and discussion amongst competitors of standard dealer remunerations in a single meeting amounted to a concerted practice involving price fixing.658 When transparency is imposed by an EU or Member State measure Article 101 does not apply because transparency does not result from any autonomous conduct by the undertakings concerned.659 For instance, compliance with the transparency obligations imposed by the REMIT Regulation660 does not expose energy compnies to liability under Article 101. However, this “state action defence” is narrowly construed. Thus, if energy companies agree to exchange commercially sensitive information beyond the requirements of REMIT Article 101 may be infringed.

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Absent a restriction by object, the exchange of information between competitors may restrict competition within the meaning of Article 101(1) when it reduces or removes the degree of uncertainty as to the operation of the market in

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655 656 657 658 659 660

undertakings and thus that there is a meeting of minds regarding market conduct. See in this regard, Case C-74/14, Eturas, ECLI:EU:C:2016:42. See in this regard also Case C-382/12 P, Mastercard, 2014 ECR page I-0000, paragraph 90. See Horizontal co-operation guidelines, paragraph 73. Information exchanges are not considered to have a restrictive object when they occur in the context of and are reasonably related to a wider business cooperation such as a joint venture to construct and operate a new power plant. See Case C-8/08, T-Mobile Netherlands, ECR 2009, p. I-4529, paragraph 37. See e.g. Joined Cases C-359/95 P and C-379/95 P, Ladbroke Racing ECR 1997, p. I-6265, paragraphs 33 and 34 Regulation 1227/211 on wholesale energy market integrity and transparency, OJ 2011 L 326/1 of 8.12.2011.

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question, with the result that competition between undertakings is restricted.661 A distinction is made between transparency that occurs naturally in the market and transparency that is created by undertakings by exchanging commercially sensitive information. This distinction is illustrated by the French Petrol Stations case. In this case operators of petrol stations on French motorways informed each other by phone of the prices charged for the various types of fuel. The information was exchanged the evening before the prices were applied. It thus gave each operator the opportunity to adjust its own prices to those of its competitors. The French competition authority adopted a prohibition decision with fines. The decision was annulled on appeal by the Paris court of appeal.662 The court reasoned that the market was concentrated and very transparent and that the observed parallelism in prices – which was not perfect – could be explained by the normal functioning of the market. This assessment is highly unlikely to reflect the current state of the law. It may well be the case that the information exchange did not significantly affect competition in the market concerned. However, information on contemplated prices is by nature sensitive and the exchange did provide the participants with information that they would otherwise only have had access to at a later point in time if they would go through the trouble of collecting it themselves. The information was not generally accessible in the exchanged form. Information is considered genuinely public only where it is generally accessible in terms of cost of access to all competitors and customers.663 In view of the T-Mobile Netherlands case law it is likely that such a scheme is caught by Article 101(1).664

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The assessment of whether an information exchange has likely restrictive effects on competition is bases on a number of factors relating to the structure of the market and the nature of the information exchanged. The structural factors include concentration levels, the degree of market transparency and the contribution of the exchange to such, the degree of market complexity and stability and the symmetry of market positions. The more concentrated and stable the market and the more the exchange contributes to market transparency, the greater the likelihood of adverse effects on competition.665 The likely impact of the exchange on competition also depends on the nature of the information that is 661 See e.g. Case C-194/99 P, Thyssen Stahl, ECR 2003, p. I-10821, paragraph 81. 662 See judgment of cour d’appel de Paris of 9.12.2003 annulling the decision of the French competition authority in Case 03-D-17, distribution of petrol on motorways. 663 See paragraph 92. 664 The Horizontal co-operation guidelines, Example 5 (paragraph 109) in effect contradicts the Paris court of appeal in the French Petrol Stations case. Thus, it is clear that the Commission does not share the court s interpretation of Article 101(1). 665 See Horizontal co-operation guidelines, paragraph 77 seq., Appendix 3.

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exchanged. The more sensitive the information the more likely it is to adversely affect competition. A number of factors are taken into account in the assessment of sensitivity:666 the strategic importance of the information. Information on prices and output is generally considered the most sensitive. Other factors include the frequency of the exchange, the age of the data and whether the data is individualised or aggregated such that it is no longer possible to identify the firm to which the data relates. In general, an information exchange is more likely to give rise to competition concerns when it involves a frequent exchange of recent individualised data. The following discussion of horizontal restrictions of competition will start with “hard-core” restraints and then address various forms of co-operation between competitors providing for an integration of economic activity. Where necessary the general principles are recalled in order to put energy-specific topics into their proper perspective.

2.

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Cartels and hard-core restraints

Cartels are the most serious violations of the competition rules. They are secret agreements or concerted practices between competing firms to fix prices, limit production or share markets or customers. Cartels cause direct and immediate harm to competition and consumers without producing any objective economic benefits. Recurrent and widespread cartel activity can also result in lower productivity gains, fewer technological improvements or the creation or maintenance of uneconomic industry structures. The weakening of competition caused by cartels may eventually lead to a loss of competitiveness of European industry. For these reasons the detection, prosecution and punishment of cartels constitutes an enforcement priority of EU competition policy not only in the energy sector but in all sectors.667 The Commission and the national competition authorities alike apply a policy of zero tolerance. There used to be a limited exception for so-called “crisis cartels”, i.e. sector-wide arrangements in chronically declining industries to limits capacity.668 However, this limited exception is no longer applied.669 The cartel enforcement policy at European level has to a very significant extent been based on the “leniency policy” which was introduced in 1996 and subsequently revised in 2002 and 666 See Horizontal co-operation guidelines, paragraph 86 seq., Appendix 3. 667 See Commission, Competition Report 2002, p.28, 32 paragraphs 26, 52; Communication p.18; recital 1 of Commission Notice on immunity from fines and reduction of fines in cartel cases, OJ C 298/17, 8.12.2006. 668 See for the most recent example, Commission Decision in Stichting Baksteen, OJ L131/15 of 26.5.1994. 669 See in this respect Case C-209/07, Beef Industry Development Society, 2008 ECR, page I-8637.

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2006. Under this policy the Commission grants reductions of fines or even total immunity from any fine to companies voluntarily submitting evidence of a secret cartel aimed at fixing prices, production or sales quotas, sharing markets including bid-rigging or restricting imports or exports.670 Suppliers fix prices when they agree amongst themselves on the price they charge to their customers for a particular product or service or components of the price. Sometimes it is easier to agree on output limitations than on prices. The result for consumers is however very much the same. Price-fixing and output limitations directly lead to consumers paying higher prices and not receiving the desired quantities. Market or customer sharing occurs when suppliers agree to limit their activities to certain energy products or geographical supply areas and abstain from competing for other energy products or supply areas. Market partitioning reduces the choice of consumers between energy suppliers and deprives them of the benefits of price and quality competition.671 The agreement of European producers of steel tubes used by the oil and gas industry not to compete in each other’s domestic markets is an example of geographic market sharing. The Commission detected the illegal practice and imposed very significant fines fine.672 Price-fixing, output limitations and market sharing agreements are referred to as “ hard-core restrictions”. The Guidelines on the application of Article 101(3) provide that for such types of restraints, “ it can be presumed that [they] have negative market effects. They are therefore almost always prohibited”.673 This statement contains two important messages. First, the negative effects of hardcore restrictions are so well known and established that they do not have to be proven in each individual case.674 It suffices to show that two or more firms actually fixed prices or agreed on any of the other hard-core restraints. Second, price-fixing, output limitation and sharing of markets or customers have almost 670 See Commission, Notice on immunity from fines and reduction of fines in cartel cases, OJ C 298/17, 8.12.2006. 671 Territorial sales restrictions agreed between competing suppliers are furthermore contrary to the market integration goal of the EU. Suppliers are not allowed to re-erect private barriers between Member States where state barriers have been successfully abolished and thereby hold up the economic interpenetration of national markets which will ultimately lead to the creation of a single European energy market. This would be contrary to the Community policy to build and maintain an internal market, see Article 3(3) EU. 672 See Commission, decision of 8.12.1999, OJ L 140/1, 6.06.2003 – Seamless steel tubes. In 2007 the Commission fined eleven groups of companies a total of 750 million EUR for participating in a cartel for gas insulated switchgear projects. Between 1988 and 2004, the companies concerned rigged bids for procurement contracts, fixed prices, allocated projects to each other, shared markets and exchanged commercially important and confidential information, see press release IP/07/80. 673 See Guidelines on the application of Article 101(3), paragraphs 20, 46. 674 See Case C-49/92 P, Anic Partecipazioni, ECR 1999, p. I-4125, paragraph 99.

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always only negative and no positive effects. They are therefore normally prohibited and cannot be justified under the efficiency defence of Article 101(3). The defence can in principle be invoked against any restriction of competition.675 However, in practice hard-core restrictions are unlikely to satisfy the four conditions for exception laid down in Article 101(3). This is particularly true for horizontal hard-core restrictions. Such restrictions do not produce any objective economic benefits, consumers do not receive a fair share and they are generally not indispensable. Cartels are penalised very severely. The parties to such arrangements are not only ordered to bring the infringement to an end,676 they are also imposed the most severe amounts of fines. Regulation 1/2003 allows the Commission to fine individual cartel members up to 10% of their total turnover of the business year preceding the infringement.677 Between 2014 and March 2018 the Commission imposed fines exceeding 8.5 billion €.678 Fines of 3.8 billion € were imposed in the Trucks cartel case.679 The exposure to firms engaging in cartel activity is thus significant. The Commission’s policy on hard-core cartels is illustrated by its decision in GDF/E.ON, which is the first case in which the Commission has imposed very substantial cartel fines on energy companies.680 The case concerns the MEGAL pipeline jointly owned and operated by E.ON Ruhrgas and GDF Suez. MEGAL transports gas across Southern Germany between the German-Czech and German-Austrian borders to the east and the French-German border to the west. When Ruhrgas and Gaz de France decided in 1975 to build the MEGAL pipeline together, they agreed in two letters that GDF would not sell any gas transported over the MEGAL in Germany and neither would Ruhrgas in France. At that time, Gaz de France enjoyed a legal monopoly to import natural gas into France, which was only removed in August 2000. Ruhrgas’ supply area in Germany was de facto protected from competition by a system of so-called “ demarcation agreements” with other German suppliers until such agreements became illegal in April 1998. According to the decision the parties maintained this market-sharing agreement after European gas markets were opened to com675 See Case T-17/93, Matra, ECR 1994, p. II-595, paragraph 85, and judgment of 27.9.2006, Case T-168/01, GlaxoSmithKline, ECR 2006, p. II-2969, paragraph 233. 676 The legal basis for the cease and desist order is Article 7 Reg.1/2003. 677 See Article 23(2) Reg. 1/2003, Appendix 2. 678 See Commission statistics available at http://ec.europa.eu/competition/cartels/statistics/statistics.pdf. 679 Id. 680 See Commission Decision of 8.7.2009, Case COMP/39.401 – GDF/E.ON. The decision is under appeal; see Case T-360/09, E.ON v Commission and Case T-370/09, GDF v Commission.

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petition as from August 2000 by Directive 98/30/EC. They allegedly met on a regular basis at various levels, discussed the implementation of the agreement in the newly liberalised market and monitored each other’s actions. The decision also states that although the parties declared in August 2004 that they had long regarded the letters as “null and void”, they continued until the end of September 2005 to implement the prohibition imposed on Gaz de France to supply gas in Germany that had been transported over the MEGAL pipeline. The Commission imposed fines of 553 million € on each of the two undertakings. The fine imposed on each company was subsequently reduced by the General Court to 320 million €.681 The Commission’s decision illustrates very clearly its tough stance on market sharing and other hard-core restrictions and the risks associated with maintaining agreements that were legal prior to liberalisation but subsequently became subject to Article 101 post-liberalisation. If such agreements are not clearly and unequivocally brought to an end there is a clear risk that in light of surrounding circumstances they are considered to have been maintained.

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More recently, the Commission intervened against two European power exchanges that allegedly engaged in market sharing. The case was closed with a catel settlement whereby EPEX and Nordpool agreed to pay fines of 3,651,000 respectively 2,328,000 €. The Commission took the view that the power exchanges engaged in a non-competition arrangement covering all their spot electricity trading services in the EEA and beyond. The aim was to restrict competition between them, to protect their traditional market and to agree on expansion to new countries.682 In 2012 the Romania competition authority imposed fines totalling € 200 million on six Romanian oil companies for coordination on the market. The companies were found to have exchanged information on their future conduct on the market and agreed on ceasing the supply of gasoline Eco Premium.683 Another example of a hard-core restriction of competition is the French jet fuel case684. This case involves alleged bid rigging between four suppliers of jet fuel. Air France launched a call for tender for the supply jet fuel to its flights from the island of Réunion. The four suppliers allegedly coordinated their bids by agreeing that they would each offer a volume reflecting their existing market share. Air France was thereby obliged to contract with all of them to cover its needs. Price competition was thereby eliminated. The French competition authority imposed fines of 41 million €. 681 682 683 684

See e.g. Case T-360/09, E.ON, ECR 2012, page II-0000. Commission Decision in Case AT.39.925, Power Exchanges of 5.3.2014. Romanian NCA, 10 January 2012, Pterom, Lukoil, Rompetrol, Downstream, Mol Petroleum, ENI. See Decision of the French Competition Authority in Case 08-D-2008 concerning the practices of Shell, ESSO, Chevron and Total. The decision is under appeal.

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The Commission’s intervention against cartels in the energy sector begs the question why it is not taking action against the Organisation of Petroleum Exporting Countries (OPEC).685 OPEC operates as a cartel in that its members decide collectively on the production volumes and quota for each of its Member countries. However, OPEC is an organization of States in which Ministers act in their capacity as owners and managers of a natural resource. Their decisions on production levels are acts of sovereign States and not an agreement entered into by undertakings as required by Article 101. Even where some Ministers are at the same time members of the board of petroleum selling companies, their participation in OPEC decisions do not turn them into decisions of undertakings caught by EC competition law and Article 101 in particular. The acts of OPEC are thus not subject to antitrust scrutiny. This analysis of the Commission is shared by the U.S. antitrust authorities and courts.686 A similar conclusion would have to be drawn if gas exporting countries were to form a ‘gas’ OPEC. It would only be otherwise if the representatives of the gas exporting companies themselves met and entered into discussions about production levels or prices. In such circumstances it is irrelevant that some of the world’s largest gas exporters are state-owned. They remain undertakings for the purposes of Article 101.

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Co-operation agreements between energy companies

The following sections deal with various types of horizontal co-operation agreements between energy companies. Co-operation agreements can take a great variety of forms. Companies operating at the same level of trade may choose to cooperate with respect to one or several functions of their energy business. They may opt, for example, to collaborate only with regard to energy production or energy commercialisation or both production and commercialisation. The envisaged co-operation may furthermore integrate parts or all their activity with respect to a specific business function. Another relevant aspect is whether the parties will carry out one or more functions jointly, e.g. in a joint venture, or will entrust each other reciprocally or unilaterally to carry out such activities, which is generally referred to as specialisation. The subsequent sections focus on those types of co-operation that have attracted the attention of the competition authorities in the past.

685 See Case No. M.1383 of 29.09.1999 – Exxon/Mobil, paragraph 28. 686 See Commission Memo/00/55 of 20.09.2000, Appendix 12 and Statement of the Federal Trade Commission of 29.03.2000, available at http:// www.house.gov/judiciary/park0329.htm.

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Co-operation in the form of “ full-function joint ventures” will under certain conditions be subject to merger control and not antitrust law.687 They will therefore not be dealt with here but in Chapter V on merger control.688 Here, the focus is on competition issues raised by co-operations that are not full-function joint ventures and which do not therefore fall within the scope of the Merger Regulation. More specifically, the discussion will focus on co-operation agreements between competitors in the areas of energy commercialisation, production and infrastructure.

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Generally speaking, horizontal restraints on competition are more likely to arise where a co-operation relates to business functions close to the market and to customers. The more a co-operation directly or indirectly leads to the co-ordination of the competing parties’ market conduct towards customers, the more the arrangement is likely to raise competition concerns. Consequently, all forms of commercialisation cooperations (i.e. joint sales agreements) between competitors are more likely to cause problems than cooperations in the area of exploration and production.

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Where parties carry out a joint commercial activity, non-compete obligations are common and are often necessary to align incentives and ensure that the parties are fully committed to that joint activity. While such obligations between competitors are generally deemed to be restrictions by object because they necessarily restrict competition that would have occurred in their absence, that is not the case when they are ancillary to a legitimate joint commercial activity, that is, when they are directly linked and necessary to implement it.689

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A distinction is generally made between in-term and post-term non-compte obligations. The Commission has made clear that “a non-competition obligation between the parent undertakings and a joint venture may be considered directly related and necessary” to the implementation of the joint venture agreement.690 The Commission explains further that “non-competition clauses reflect, inter alia, the need to ensure good faith during negotiations; they may also reflect the need to fully utilise the joint venture’s assets or to enable the joint venture to assimilate know-how and goodwill provided by its parents; or the need to protect 687 An example for such a joint venture is the entry of Wingas in the gas trading company of Norsk Hydro in the United Kingdom Hydro Wingas. See Norsk Hydro/Wingas/Hydrowingas JV in Case No. M.3350 of 2.02.2004. 688 See book paragraphs 4.30. et seq. 689 Case 42/84 Remia ECR 1985 page 2545, paragraph 20 690 See paragraph 36 of the Commission Notice on restrictions directly related and necessary to concentrations, OJ C 56/24, 05.03.2005.

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the parents’ interests in the joint venture against competitive acts facilitated, inter alia, by the parents’ privileged access to the know-how and goodwill transferred to or developed by the joint venture.” 691 However, in-term non-competition obligations qualify as ancillary restraints only if they “correspond to the products, services and territories covered by the joint venture agreement”.692 An obligation to purchase a product exclusively from a joint venture is block exempted.693 Post-term non-competition obligations are typically found to be ancillary in the context of the transfer of a business where the purchaser may need protection against competition from the seller in order to obtain the full value of the assets transferred.694 Siemens/Areva illustrates the Commission’s assessment of non-compete obligations.695 In 2001, Siemens and Areva created a full-function joint venture in which they combined their respective activities in relation to nuclear power plants. In 2009, Siemens decided to leave the joint venture. The joint venture agreement between the two companies included a non-compete obligation, which not only covered the lifetime of the joint venture but was to continue for a period of eight to 11 years after Siemens’ loss of joint control in the joint venture. In its commitments decision, the Commission took the preliminary view that the non-compete clause infringed Article 101 due to its broad scope and long duration. The clause prevented, on a worldwide basis, competition by Siemens on the markets of the joint venture’s core products and core services, in particular nuclear islands, nuclear services, and nuclear fuel assemblies. It also prevented competition with respect to a number of markets where the joint venture was not active or was active only occasionally as a reseller of Siemens’ products (various components and conventional islands for nuclear power plants). Thus, the non-compete obligations included products that did not form part of the joint activities.

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The case demonstrate that even in an industry characterized by long-term investments, such as the nuclear industry, non-compete clauses are scrutinized carefully and must be limited to the strict minimum in terms of duration and scope. Moreover, in order for a non-compete clause to be acceptable following the end of joint activities, it is necessary that there is a genuine nexus between the restraint and the previous joint activities. In the absence of such nexus between the scope of the restraint and the economic activity covered by the cooperation agreement, a non-compete clause will be difficult to justify.

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691 692 693 694 695

Id. Id. See Article 2(3)(a) of Commission Regulation1218/2010 on categories of specialisation agreements. See Commission Decision of 18.6.2012, Case COMP/39736 – Siemens/Areva (2012), paragraph. 50. Commission Decision of 18.6.2012, Case COMP/39.736 – Siemens/Areva.

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3.1 General principles and factors 3.72

Before dealing with the individual aspects of the various types of cooperation arrangements between energy companies it is useful to first set out a number of general principles and factors that are common to these cooperation agreements. These factors form the basis of the self-assessment that energy companies need to engage in when concluding and implementing cooperation agreement.

3.1 Factors relevant to the assessment under Article 101(1) FEU 3.73

The competition assessment required under Article 101(1) is based on a number of market related factors that collectively aim at allowing the person conducting the assessment to ascertain the likely market effects of the agreement. The main factors are the following:696 •

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Market position of the parties to the co-operation agreement

Market shares are commonly regarded as a useful indicator of market power, i.e. the ability to charge prices above the competitive level and adversely affect other important aspects of competition and consumer welfare. The higher the combined market share of the parties, the greater is the probability that they possess a significant degree of market power. However, the market share analysis has to be refined taking into account the specificities of the industry and the market concerned. This may mean for electricity markets, for instance, that the market power of a generator may be more significant than its market share might suggest. Since electricity cannot yet be stored on a large scale,697 a generator may have power over price or output at certain times because its power plants are mainly geared towards producing peak power or because its capacity is in any event indispensable to satisfy market demand. Market power analysis can therefore usefully draw on additional indicators such as the Pivotal Supplier Index (PSI) and Residual Supply Index (RSI).698 The PSI provides the percentage of hours during which a given operator is indispensable to meet demand in the market, i.e. where the sum of the available generation capacities of all other

696 See Horizontal co-operation guidelines paragraph 20 seq., Appendix 3 and Vertical restraints guidelines paragraph 111 seq., Appendix 4. 697 Advances in battery technology is paving the way for storage of electricity that over time may affect the traditional economics of power generation where continuous generation is required to balance supply and demand. See in this regard https://www.forbes.com/sites/kensilverstein/2018/07/13/energy-storage-making-headway-in-california-and-paving-way-for-other-states/#2617d48f6ee9. 698 See Final Report on the Energy Sector Inquiry, pp. 319 et seq.

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producers in the market is not sufficient to meet demand in the given hour.699 A high percentage of hours indicates that the operator is indispensable (Pivotal) for a substantial period of time, giving it the scope to exercise market power for sustained periods of time. The RSI of a given operator in a given hour is a ratio between the between the sum of the available capacity of all other operators and total demand in that hour. In addition to measurements of concentration and indispensability other factors that may be indicative of market power are taken into account. Competitive advantages like cost advantages, superior technology, flexible power plants based on broad fuel mix, brand leadership or superior product portfolios may further underpin an indication of market power based on market shares. The ensuing additional factors may or may not confirm the competition analysis of the market position of the parties to the co-operation agreement.700 •

Market position of competitors

Actual competition from third parties is generally the most important competitive constraint facing the parties to the agreement. The stronger the rivals are and the greater their number, the less likely it is that the agreement restricts competition. If their competitors have significantly lower market shares than the parties, this is an indication that the agreement may allow the parties to gain, maintain or increase market power. If the number of rivals is small and their market position similar to that of the parties, one speaks of an oligopolistic market. On such markets a restriction of competition through tacit collusion may occur. It is recalled that tacit collusion requires that the firms belonging to the oligopoly have similar views on what is in their common interest and how the co-ordination mechanisms functions. This means that the firms must be able to monitor each other’s market behaviour and that there must be adequate deterrents to ensure that there is not an incentive to depart from the common policy on the market. While tacit collusion as such is not caught by Article 101, agreements that facilitate tacit collusion may restrict competition within the meaning of that provision. •

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Countervailing buyer power

Besides rivals, buyers may also be capable of exerting a competitive constraint on the parties to the agreement. The market share of professional buyers as pur699 The PSI index thus measures the extreme situation where an operator ceases entirely to supply. 700 See in this respect study on Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005, February 2007. The study is published on the DG Competition website.

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chasers, and if they are resellers, their share of the respective resale markets, the geographic spread of their outlets and other competitive characteristics provide indications of the probability of the existence of bargaining strength that buyers have because of their commercial significance and their ability to switch to alternative suppliers. However, the existence of countervailing buyer power presupposes that they have a real possibility to sponsor new entry or switch between existing suppliers. If the agreement allows the parties to obtain a high degree of market power buyers may have little scope for reducing such market power. This is particularly the case in energy markets where demand is inelastic. Moreover, buyer power is only taken into account as a significant competitive constraint if it affects the overall market. It is not sufficient that a few large buyers get a better deal if the agreement still allows the parties to exercise market power over the rest of the market.701 •

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Mobility or entry barriers

Regulation, import constraints, natural limitations on energy resources, economies of scale and other obstacles may limit the growth of actual competitors or the entry of potential competitors. If, for example, the minimum efficient scale702 for the production or commercialisation of an energy product is large compared to the size of the market, potential competition may be less likely because efficient entry may be costly, require time and therefore be risky. This means that the size of the geographic market matters. For instance, the risks of entering a market with a new nuclear power plant may be greater in a small market than a large market because the volume and price impact will be greater in a small market. The viability of entry depends inter alia on the likely postentry price. If, on the other hand, potential entrants have access to cost-efficient methods or other competitive advantages allowing them to compete successfully against incumbents, this may facilitate entry. For network industries like electricity and gas the lack or scarcity of available transmission capacity, especially on a trans-European basis, often forms an important barrier for competition to emerge. The Commission regards entry barriers to be low if a new market entrant is likely to erode supra-normal profits (prices above minimum average costs) within one or two years.703

701 See Commission Guidelines on the application of Article 101(3), paragraph 115. 702 The minimum efficient scale is defined as the rate of output where average costs are minimised. If the minimum efficient scale is large compared to the size of the market, efficient entry is likely to be more costly and risky. 703 See Vertical restraints guidelines paragraph 117, Appendix 4.

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•

Other factors

Other factors such as the maturity of the energy market or the level of trade can complete the analysis of the above mentioned elements. Negative competition effects of cooperation agreements are more likely in a relatively stable or declining market. In contrast, negative competition effects are generally less probable at the level of intermediate energy products or services.

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3.3 Efficiency defence under Article 101(3) FEU For all co-operation agreements between energy suppliers found to restrict competition and not benefiting from the safe harbour of a block exemption regulation, the efficiency defence of Article 101(3) may be invoked. When the four cumulative and exhaustive conditions of Article 101(3) are satisfied, the agreement enhances competition within the relevant market, since it leads the undertakings concerned to offer cheaper or better products to consumers, compensating the latter for the adverse effects of the restrictions of competition. The very essence of competition is the effort to win customers by offering cheaper, better and more innovative products on the market. Agreements that on balance improve supply to the market are pro-competitive.

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The Commission’s Guidelines on the application of Article 101(3)704 reflect the regime created by Regulation 1/2003, where undertakings have to self-assesses whether their agreements are compatible with Article 101 and where the Commission is focussing on pro-active enforcement against agreements and practices that give rise to real competition concerns. As a result of the more effects based approach under Article 101(1), fewer cases will be caught by the prohibition rules.705 However, when Article 101(1) does apply, careful analysis of all four conditions of Article 101(3) is required.

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•

Does the co-operation contribute to improving the distribution of energy products or services706 or contribute to promoting technical or economic progress?

The purpose of the first condition of Article 101(3) is to establish whether a cooperation restricting competition generates objective and verifiable economic 704 OJ 2004 C101/ 97 of 27.04.2004 705 See above book, Chapter 3.36. 706 Article 101(3) TFEU applies by analogy also to services, see Guidelines on the application of Article 101(3) paragraph 48.

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benefits. The benefits can derive from cost reductions (“quantitative efficiency gains”) or from advantages of a qualitative nature, e.g. new products, improved quality, greater product variety etc. (“qualitative efficiency gains”)707. The benefits that are taken into account under the first condition must result from the economic activity covered by the agreement but need not flow from its restrictions. The nexus between the benefits and the restrictions is analysed under the condition of indispensability. In general, relevant economic benefits stem from the economic activity which is regulated by the agreement and more specifically from an integration of economic activity whereby undertakings combine assets to achieve what they could not achieve as efficiently on their own or whereby they entrust another undertaking with tasks that can be performed more efficiently by that other undertaking.708 The research and development, production and distribution process may be viewed as a chain709 that can be divided into a number of stages. Cooperation between undertakings at each stage of this chain may give rise to economic benefits within the meaning of Article 101(3)710. Distribution agreements may in particular allow the parties to reduce costs or provide better services to customers.

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In order to maintain a proper balance between Article 101(1) and Article 101(3) and as a consequence of the greater weight attributed to economic analysis and the consumer welfare objective, the Guidelines impose more rigour in the assessment of efficiency claims. Efficiency claims must be backed up by evidence before they can be given weight by the Commission. As the Court of Justice has confirmed, the burden of proof falls on the undertaking invoking the benefit of Article 101(3).711 However, the facts relied on by that undertaking may be such as to oblige the other party to provide an explanation or justification, failing which it is permissible to conclude that the burden of proof has been discharged.712 The Guidelines713 provide that all efficiency claims must be substantiated so that the following can be verified: (1)

The nature of the claimed efficiencies;

(2)

The link between the agreement and the efficiencies;

707 708 709 710 711

See Guidelines on the application of Article 101(3) paragraphs 59, 69. See Guidelines on the application of Article 101(3), paragraph 60. This term has been developed by Porter, Competitive Advantage, The Free Press, 1985. See Guidelines on the application of Article 101(3), paragraph 61. See Joined Cases C-501/06 P a.o., GlaxoSmithKline Services, ECR 2009, p. I-9291, paragraph 83. This allocation of the burden of proof is codified in Article 2 of Regulation 1/2003. 712 Id., and Horizontal co-operation guidelines, paragraph 48, Appendix 3. 713 See paragraphs 98 and 102.

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(3)

The likelihood and magnitude of each claimed efficiency; and

(4)

How and when each claimed efficiency would be achieved.

While the Guidelines clearly establish a rigorous framework for assessing efficiency claims, they also explicitly acknowledge that the assessment of efficiencies is not an exact science. Words such as “as accurately as reasonably possible” suggest that the obligation imposed is one of best efforts. ­Moreover, the Guidelines as a whole are based on a sliding scale approach:714 the greater the competition concerns identified under Article 101(1), the greater must be the efficiencies and the more they must be substantiated. The analysis of pro-competitive and anti-competitive effects under Article 101 is often a question of probabilities.715 What the party invoking Article 101(3) is required to do is to make a convincing case in its favour.716

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Are the co-operation agreement and its individual restriction indispensable to achieve the efficiencies?

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The second condition of Article 101(3) requires an analysis of whether the agreement as such or its individual restrictions, e.g. a market sharing clause, are indispensable to attain the benefits. It must therefore be asked whether the collaborating suppliers could not have achieved the same benefits through internal growth (“agreement-specificity of the benefit”) or without the restriction (“restriction-specificity of the benefit”)?

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A restriction is indispensable if its absence would eliminate or significantly reduce the efficiencies that follow from the agreement or make it significantly less likely that they will materialise. If there are less restrictive means to achieve the benefits of the envisaged co-operation, only these will be compatible with Article 101.717

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When applying the indispensability test, the decisive factor is whether or not the restrictive agreement and individual restrictions make it possible to perform the underlying economic activity more efficiently than would likely have been the case in the absence of the agreement or the restriction concerned.718 The question is not whether, in the absence of the restriction, the agreement would

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714 715 716 717 718

See e.g. paragraph 90. See Case T-168/01, GlaxoSmithKline, ECR 2006, p. II-2969, paragraph 302. See Joined Cases C-501/06 P a.o., GlaxoSmithKline Services, ECR 2009, p. I-9291, paragraph 82. See Guidelines on the application of Article 101(3), paragraphs 75, 78. See Guidelines on the application of Article 101(3), paragraph 74.

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have been concluded or not, but whether more efficiencies are produced with the agreement or restriction than would have been the case in the absence of the agreement or restriction.719

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Moreover, it is important to note that undertakings invoking the benefit of Article 101(3) are not required to consider hypothetical or theoretical alternatives. The Commission makes clear that it will not second-guess the business judgment of the parties. It will only intervene where it is reasonably clear that there are realistic and attainable alternatives. The parties must only explain and demonstrate why such seemingly realistic and significantly less restrictive alternatives to the agreement would be significantly less efficient. •

Do consumers receive a fair share of the economic benefits resulting from the distribution agreement?

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According to the third condition of Article 101(3) the negative effects of the arrangement have to be balanced against its positive effects on consumers. The net effect of the co-operation has to be at least neutral in order to be compatible with competition law. This implies that actual or potential customers of the collaborating parties must be fully compensated for any actual or likely adverse effect (“full compensation principle”).720 On the other hand it is not a condition that consumers require a certain minimum share of the benefits or that they receive a share of all the different types of benefits that may flow from an agreement.721 The third condition of Article 101(3) is satisfied once the positive effects of the agreement on consumers outweigh the negative effects. It is also not a condition that each and every consumer in an adversely affected relevant market benefits. Under Article 101(3), it is the beneficial nature of the effect on the affected group of consumers that must be taken into consideration, not the effect on each member of that category of consumers.722

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In previous guidelines723 the Commission assumed that sufficient pass-on would normally occur if sufficient residual competition was maintained on the market. The Guidelines on the application of Article 101(3) have abandoned this pre719 In the case of intra-brand restrictions, Article 101(1) does not apply if in the absence of the restraint such an agreement would not have been concluded, see Guidelines on the application of Article 101(3), paragraph 18(1). 720 See Guidelines on the application of Article 101(3), paragraph 85. 721 See Guidelines on the application of Article 101(3), paragraph 86. 722 See Case C-.238/05, Asnef-Equifax, ECR 2006, p. I-11125, paragraph 70. 723 See paragraph 34 of the 2000 Guidelines on horizontal cooperation agreements and paragraph 136 of the 1999 Guidelines on Vertical Restraints.

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sumption. Residual competition remains relevant but is only one factor amongst others. In the absence of restrictions by object, Article 101(1) applies only when the parties have or obtain a significant degree of market power and the agreement contributes to the creation, maintenance or strengthening of market power. In other words, Article 101(1) applies only where the undertakings concerned are not subject to an effective competitive constraint. In such cases it is not warranted to assume that residual competition on its own is sufficient to ensure that adequate pass-on of the benefits to consumers occurs. This is not to say that residual competition is irrelevant. The factors that according to the Guidelines are particularly relevant are (a) the characteristics and structure of the market, (b) the nature and magnitude of the efficiency gains, (c) the elasticity of demand, and (d) the magnitude of the restriction of competition.724 The reference to market structure and characteristics captures the degree of residual competition in the relevant market. The second factor reflects the fact that some types of efficiency are more likely to be passed on than others. Indeed, efficiencies of a qualitative nature that manifest themselves in the goods and services sold to consumers are necessarily passed on. If a production joint venture leads to the production of an improved product or a distribution agreement leads to the provision of improved services, these benefits are necessarily passed on to users of the goods and services in question. In such cases, the main task is to assess whether these benefits are sufficient to compensate for any price increase or other likely anti-competitive effects resulting from the agreement such as foreclosure of competitors and a resulting loss of product variety. In the case of cost efficiencies the situation is more complex. Cost savings will generally only benefit consumers if they lead the undertakings concerned to lower prices. Economic theory suggests that this is more likely to occur in the case of reductions in variable costs than in the case of fixed cost reductions. Undertakings maximise their profits by selling units of output until marginal revenue equals marginal cost. Marginal revenue is the change in total revenue resulting from selling an additional unit of output. Marginal cost is the change in total cost resulting from producing that additional unit of output. If marginal costs fall, even undertakings with market power may have an incentive to reduce prices whereas the same is not true for fixed costs. This does not mean that fixed costs savings cannot be taken into account. However, given the facts that economic theory predicts that undertakings have no direct incentive to pass on 724 See Guidelines on the application of Article 101(3), paragraph 96.

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fixed cost reductions, the burden of proof is higher in the case of such efficiencies. It may be that in reality reductions in fixed costs do have an impact on pricing decisions, and if undertakings can make a robust case in their favour, the Guidelines leave the door open for taking such efficiencies into account.

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The extent to which cost savings will lead to an increase in output and a reduction in price also depends on the elasticity of demand. The actual pass-on rate depends on the extent to which consumers respond to changes in price. The greater the increase in demand caused by a decrease in price, the greater the passon rate. This follows from the fact that the greater the additional sales caused by a price reduction due to an increase in output, the more likely it is that these sales will offset the loss of revenue caused by the lower price resulting from the increase in output.725 In energy markets where elasticity of demand is generally low, the pass-on of a high share of costs savings may thus be unlikely, since a price reduction will not have a large impact on demand. However, it must be taken into account that the elasticity of demand for the output of an individual undertaking is likely to be higher than the elasticity of demand on the overall market. However, as many gas and electricity markets are highly concentrated the firm specific and market elasticity of demand may often substantially converge with the result that significant pass on of cost efficiencies is unlikely.

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Finally, the second condition of Article 101(3) implies that the pro-competitive effects and the anti-competitive effects created by the agreement must be balanced against each other and the pro-competitive effects must outweigh the anti-competitive effects. The efficiency effect must dominate the market power effect of the agreement. This exercise can in practice be a difficult one. It is therefore important that the Guidelines726 provide that if the restrictive effects of an agreement are relatively limited and the efficiencies are substantial, it is likely that a fair share of the cost savings will be passed on to consumers. In such cases it is therefore normally not necessary to engage in a detailed analysis of the second condition of Article 101(3), provided that the three other conditions for the application of this provision are fulfilled. Conversely, if the restrictive effects of the agreement are substantial and the cost savings are relatively insignificant, it is very unlikely that the second condition of Article 101(3) will be fulfilled. Full-blown balancing is thus confined to “grey zone” cases, where it is unavoidable, unless the agreement has already failed one of the other cumulative conditions of Article 101(3). In practice, agreements are unlikely to escape Article 101 on efficiency grounds when their impact on competition is substantial. In such cases competi725 See Guidelines on the application of Article 101(3), paragraph 99. 726 See on the application of Article 101(3), paragraphs 90 and 91

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tion authorities will likely be reluctant to conclude that the restrictions of competition are justified on efficiency grounds. However, this does not mean that it is not worthwhile to demonstrate the benefits that consumers derive form the agreement. When the benefits are significant competition authorities will also be reluctant to prohibit the agreement and are likely to seek a settlement that leave the arrangement and the resulting benefits substantially intact. • Does the co-operation afford the possibility of eliminating competition in respect of a substantial part of the energy products in question? The last condition of Article 101(3) requires a comparison of the competition situation existing prior to the distribution co-operation and the situation thereafter. The more competition on the energy market is already weakened, the more likely it is that the co-operation eliminates competition. If, for example, the distribution co-operation eliminates price competition or any other important parameter of competition, the efficiency defence is unlikely to justify the restriction of competition it brings about.727 Suppliers enjoying a dominant or quasi-dominant position will find it more difficult to justify a distribution cooperation with a rival than less powerful energy suppliers. However, it is important to note that the concept of dominance is not synonymous with the concept of elimination of competition.728 Given that dominance is a question of degree,729 dominance may be sufficient for a finding of elimination of competition. However the mere finding of dominance is not sufficient. Further enquiry into the degree of market power and the relationship between the agreement and such market power is required.730 According to the Commission’s Guidance Paper on Article 102, it is only when the market position of the parties approaches monopoly that competition is likely to be eliminated.731

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Commercialisation of energy

Commercial cooperations exist in many shapes and forms. They may comprise multiple marketing functions or only one single function such as joint advertis727 See Guidelines on the application of Article 101(3) paragraphs 107, 110. 728 See T-395/94, Atlantic Container Line, ECR 2002, p. II-875, paragraph 330. 729 Compare e.g. Case T-65/89, BPB Industries and British Gypsum, ECR 1993, p. II-389 and Case T-219/99, British Airways, ECR 2003, p. II-5917. 730 Once remedies that reduce the impact on competition below the threshold of elimination of competition are found, the last condition of Article 101(3) cannot serve as a basis for removing further restrictions of competition. This can be required only if the other three conditions of Article 101(3) are not satisfied. 731 See Commission, Communication – Guidance on the Commission’s enforcement priorities in applying Article 102 to abusive exclusionary conduct by dominant undertakings, OJ C45/02, 24.2.2009.

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ing. The compatibility of commercialisation cooperations with competition law depends on their effects on competition. The following three types of commercialisation agreements seem to be particularly frequent or interesting for players in the energy industry: joint selling, distribution by a competitor and other joint marketing activities.

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Joint selling may lead to the determination of all commercial aspects of the sale of a product, e.g. promotion, distribution, sales and service, by the parties to a commercialisation agreement.732 Most importantly, joint selling by definition includes the fixing of the price for the jointly commercialised product.733 Pricefixing therefore constitutes an integral part of every joint selling activity irrespective of whether the partners expressly provide for it in their agreement or not.

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Price fixing between competitors is a hard-core restraint unless it relates to the fixing of prices charged to immediate customers in the context of joint distribution.734 This means that a pure joint sales agency whereby competitors jointly sell individually produced and distributed products will generally be considered to have as its object the restriction of competition irrespective of whether it is exclusive or non-exclusive.735 The fact that the parties would be able to show that the agreement would not have been concluded absent the restraint is of no consequence since the agreement – given that it is concluded between competitors – restricts competition between the parties that would have occurred in its absence.736 Moreover, given the absence of any significant integration of economic activity, a pure joint sales agency is highly unlikely to generate sufficient efficiencies to outweigh the anti-competitive aspects of the arrangement. Indeed, such arrangement generally amount to a cartel and will normally be subject to fines.

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However, if absent joint selling the parties would not have been able to enter a new market the agreement does not restrict competition between the parties on the market concerned. Such cases are sometimes referred to as consortia arrangements, which relate to cooperations between undertakings that are not capable 732 See Horizontal co-operation guidelines, paragraph 225, Appendix 3 733 Id. 734 Article 4(a) Specialisation block exemption Regulation. In this latter case joint selling is not naked but forms part of a broader integration of economic activity. 735 See Horizontal co-operation guidelines, paragraph 234, 235, Appendix 3. 736 Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 18(a).

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of independently carrying out a specific project or activity.737 An example of such an arrangement would be the case of two or more energy suppliers jointly selling energy into a new geographic market which it would not be economical for them to enter on their own, e.g. because of the costs and risks involved. Since the members of the consortium are not actual or potential competitors on the new geographic market, joint selling does not restrict competition on this market. However, consortia may have restrictive effects on other markets where they are independently competing. These possible restraints are called “spill-over effects” because co-operation in one market may negatively “spill-over” onto another market. An important prerequisite for such effects to occur is that the co-operating parties enjoy a strong position in the “spill-over market”.738 When joint selling forms part of an overall economic activity which provides for real integration of economic activity it can normally not be considered a hard-core restriction.739 Nevertheless, according to the Horizontal co-operation guidelines the price fixing associated with joint selling is considered a restriction by object unless it is necessary for carrying out the joint economic activity in the sense that the parties would not otherwise have an incentive to enter into the agreement in the first place.740 This is important since in the case of restrictions by object the investigated party has to make a credible efficiency defence before the Commission is required to show likely effects on competition. Hence, there is a greater burden on the investigated company than in the case of restrictions by effect where Article 101(3) becomes relevant only when likely adverse effects on competition have been shown.741 It remains to be seen whether this approach will be maintained following the judgement in Groupement des Cartes Bancaires.742 The case involved an association of French banks that determined various conditions imposed on participants in a payment card system. Unlike the Commission, the European Court of Justice held that the restrictions imposed did not have a restrictive object. It also made clear that for an agreement to restrict competition by object it must by its very nature be harmful to the proper functioning of normal competition. Arguably, this is not the case when joint price setting forms part of a broader integration of economic activity in which the parties market a jointly produced product. 737 See Horizontal co-operation guidelines, paragraph 237, Appendix 3. 738 See Horizontal co-operation guidelines, paragraphs 156, Appendix 3. 739 It may be otherwise if it is clear that there is no reasonable business justification for extending the cooperation to joint selling. 740 See paragraph 160, Appendix 3. 741 See Commission Decision of 14.7.2010, Case COMP/39.596 – BA/AA/IB and of 25.5.2013, Case AT.39.595 – Continental/United/Lufthansa/Air Canada. 742 Case C-67/13 P, Groupement des Cartes Bancaires, ECR 2014, p. I-0000.

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When effects-based analysis is required it is necessary to assess whether the parties have market power and whether the agreement allows the parties to obtain, maintain or strengthen such market power. If the parties have a weak position on the market, joint selling is unlikely to have adverse effects on competition. In such cases joint selling may actually allow the parties to compete more effectively with larger incumbents and therefore have pro-competitive effects. New entrants often face the problem of having insufficient access to gas and electricity. Joint selling may allow them to become a more credible competitor on the market.

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The next step in the analysis is to assess whether the adverse effects are outweighed by efficiency gains. The assessment of efficiencies under Article 101(3) implies inter alia that joint selling and the resulting fixing of prices must be indispensable to achieve the benefits of the cooperation. Price fixing must therefore in general be required for the integration of other marketing functions.743 When the parties collectively have a significant degree of market power joint selling will generally have significant adverse effects on competition in which case substantial efficiencies must be demonstrated.744 This means that when joint selling is caught by Article 101(1), it is unlikely that the conditions of Article 101(3) will be satisfied. In this regard it is important to note that cost savings that arise from the mere exercise of market power by the suppliers cannot be taken into account.745 When companies agree to fix prices they reduce output and thereby production costs. Reduced competition may also lead to lower sales and marketing expenditures. Such cost reductions are a direct consequence of a reduction in output and value and therefore do not constitute objective economic benefits within the meaning of Article 101(3) since they do not produce any pro-competitive effects on the market. In particular, they do not lead to the creation of value through an integration of assets and activities. They merely allow the undertakings concerned to increase their profits and are therefore irrelevant from the point of view of Article 101(3). Secondly, the size of the efficiencies generated through joint selling depends, inter alia, on the importance of marketing in terms of the overall cost structure of the energy product in question. Joint selling is generally more likely to lead to significant efficiencies where the product concerned is widely distributed to final consumers than where it is only bought by a limited number of professional users. A co-operation causing such substantial anti-competitive effects that it eliminates competition on the 743 See Horizontal co-operation guidelines, paragraph 246, Appendix 3. 744 See Guidelines on the application of Article 101(3), paragraphs 90 to 92. 745 See Guidelines on the application of Article 101(3), paragraph 49, and Horizontal co-operation guidelines, paragraph 247, Appendix 3.

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market concerned cannot be justified irrespective of its economic benefits. The last condition of Article 101(3) imposes an absolute ceiling on the exemption of restrictive cooperations. Ultimately the protection of rivalry and the competitive process is given priority over efficiency gains, which could result from cooperation746. This means that restrictive agreements entered into by parties with combined market shares approaching monopoly cannot normally be justified on efficiency grounds.747 The most prominent case involving joint selling in the energy industry has, to date, been the Norwegian gas negotiation committee called GFU (“Gassforhandlingsutvalget”). The GFU negotiated natural gas sales contracts with a limited number of mostly continental European buyers on behalf of all Norwegian producers and thus fixed the selling price, volumes and all other trading conditions. The sales activity was not combined with any other function, e.g. production or transport.748

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The Commission concluded that the arrangement infringed Article 101.749 The companies concerned claimed immunity from antitrust scrutiny arguing that they had been compelled by the Norwegian state to sell gas from the Norwegian continental shelf through the GFU system.750 Producers stated and the Norwegian government confirmed that the GFU had been established by the government itself. The GFU sales organisation always received endorsement by public institutions like the Norwegian Parliament and, in the year 2000 a Norwegian Royal Decree was adopted which obliged producers to market their Norwegian gas through GFU. The Commission argued, however, that state endorsement would not release gas producers from their antitrust responsibilities, and that a

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746 See Guidelines on the application of Article 101(3) paragraph 105. 747 See in this respect Guidance Paper on Article 102 FEU, OJ 2009 C 45/7 of 24.2.2009, paragraph 30. 748 See Commission, Competition Report 2002, p. 207; Lindroos/Schnichels/Svane, Liberalisation of European Gas Markets – Commission settles case with Norwegian gas producers, Competition Policy Newsletter 2002 (3) p. 51. 749 It is interesting to note that in 2007 the two largest Norwegian producers, Statoil and Hydro, merged. The merger was cleared by the Commission in its decision of 3.5.2007 in Case COMP/M.4545 – Statoil/Hydro. The merger case and the GFU case illustrate the importance of the distinction between restrictions by object and restrictions by effect. In the case of restrictions by object there is no need to show the likely negative effects of the restrictions. They are presumed to exist. In other cases, including merger cases, the Commission must show that the arrangement gives rise to likely negative effects on competition that are not outweighed by the benefits associated with the resulting integration of economic activity. In the GFU case there was no real integration of economic activity that could outweigh the presumed restrictive effects. 750 Community competition law recognises the so-called state action defence whereby an undertaking is not held liable if it is acting under state compulsion since in that case there is no autonomous market conduct; see e.g. Case C-198/01, CIF, ECR 2003, p. I-8055. The defence only applies when it precludes undertakings from engaging in autonomous conduct which remains capable of preventing, restricting or distorting competition.

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law creating obligations for gas companies which conflicts with the EEA Treaty could not have that effect either.751

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In the end the GFU case was settled. All gas producers concerned committed to market their Norwegian gas individually in future. The permanent members of the GFU, which were also by far the largest producers and exporters of Norwegian gas, undertook in addition to offer 13 bcm and 2.2 bcm respectively of gas for sales to new customers over a period of approximately 4 years, corresponding to more than 5% of the annual total sales of Norwegian gas.752 Moreover, the Norwegian authorities abolished the Royal Decree, which had expressly confirmed the operations of GFU.

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In GFU the Commission did not apply its normal approach to hard-core restrictions, which is to impose a cease-and-desist order and fines. This may be (partly) due to the involvement of the Norwegian state. If a national law requires undertakings to engage in conduct that restricts competition, the undertakings concerned cannot be exposed to any penalties in respect of past conduct where the conduct was required by the law concerned.753 Thus, in order to impose a fine in the GFU case the Commission would have had to discard the claim that the conduct engaged in by the gas producers was imposed by Norwegian law. Prima facie, this may have been difficult given the 2000 Royal Decree. Moreover, a cease and desist order would likely have meant that the parties would have been required not only to put an end to the joint selling but also to eliminate the restrictive effects residing in the long-term gas sales contracts that were concluded by the joint sales agency.754 In order to bring the infringement effectively to and end it would arguably have been necessary to end the existing jointly concluded long-term sales contracts since they would have been affected by the increase in market power that joint selling would normally entail755. However, the Commission did not take this route. In stead, it closed the case after the parties had undertaken to sell a significant volume of gas to “new customers”.756 In the particular context of the GFU case the Commission apparently considered it preferable from a competition policy perspective to accept remedies, which were forward-looking and actively contributed to the creation of an internal gas 751 752 753 754 755

See in this regard Case C-198/01, CIF, ECR 2003, p. I-8055. See Commission press release IP/02/1084; available at http://europa.eu.int/rapid. See Case C-198/01, CIF, ECR 2003, p. I-8055, paragraph 53. See Commission press release IP/01/830 of 13.6.2001; available at http://europa.eu.int/rapid. The Commission is empowered and sometimes even required to impose remedies to eliminate the consequences of an infringement, see e.g. Case C-119/97, Union française de l’express (Ufex), ECR 1999. p. I-1341, paragraph 94, and Case C-62/86, AKZO, ECR 1991, p. I-3359. 756 See Article 25(1)(b) Reg. 1/2003, Appendix 2.

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market. The commitments enhanced gas-to-gas competition in offering access to additional supply sources for new entrants. The lack of gas liquidity was one of the major obstacles to effective competition and successful liberalisation. However, even if such policy considerations may have played a decisive role, the fact remains that there is no nexus between the between the identified competition problem, i.e. joint selling, and the remedy, i.e. gas release. Indeed, the alleged infringement and the remedy relate to two distinct groups of consumers, namely those that purchased from the joint sales agency and those that did not but may have wanted to. While the agreement may have led to a reduction in output to the detriment of new entrants the fact remains that the main effect of joint selling is on the customers that actually bought long-term from the joint entity and paid a jointly fixed price. The remedy does not address this aspect and is arguably inconsistent with settled case law according to which the purpose of a remedy is “to re-establish compliance with the rules infringed”,757 and the power to impose remedies must “be applied according to the nature of the infringement found”.758 It follows from these requirements that there must be a nexus between the infringement and the remedy imposed. The nature of the infringement therefore determines the range of remedies available to the Commission in a given case. The remedy accepted by the Commission in the GFU case would have been entirely suitable if the Commission had been investigating a case involving market foreclosure instead of a collusion case. The GFU case is in this respect an example of contamination of competition policy by liberalisation objectives.

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It is highly unlikely that in future the Commission will refrain from imposing fines in cases involving hard-core restrictions of competition. As is clear from its decision in the E.ON/GDF case the Commission has a firm policy of zero tolerance towards naked price fixing, market sharing and output restriction.759

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4.2 Distribution of energy by a competitor Cooperation between energy suppliers may also take the form of distribution agreements whereby a supplier undertakes to distribute a competitor’s products.760 Distribution agreements are typically concluded on a long-term basis. A mere sale of electricity, gas or petrol to a rival does not qualify as distribution by 757 758 759 760

Joined Cases C-241/91 P and C-242/91 P, Magill, ECR 1995, p. I-743, paragraph 93. Id., paragraph 90 and Joined Cases 6/73 and 7/73, Commercial Solvents, ECR 1974, p. 223, paragraph 45. See Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF. If the distribution agreement is concluded by non-competitors it is subject to the vertical restraints block exemption and guidelines, see Chapter 3 below.

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a competitor.761 Distribution agreements between actual or potential competitors may be pro-competitive. This may for instance be the case when a small supplier appoints another (small) supplier as its distributor. However, distribution agreements between competitors also have considerable potential for adversely affecting competition. This is clearly the case when the agreement provides for explicit exclusivity or territorial or customer sales restrictions. However, even in the absence of such explicit restraints the agreement may give rise to anti-competitive effects. The Commission thus has intervened against what it considered to de facto constitute a long-term supply agreement whereby the second largest supplier of rough diamonds agreed to supply large quantities of rough diamonds to a dominant competitor.762 In the assessment of distribution agreements between competitors it is useful to distinguish between unilateral or reciprocal agreements. Reciprocal distribution means that two (competing) suppliers appoint each other as distributors of their respective products. Unilateral or non-reciprocal distribution implies that one supplier becomes the distributor of the products of another supplier but that the latter does not become the distributor of the products of the first supplier. If the parties use a reciprocal distribution agreement to eliminate actual or potential competition between them by deliberately allocating markets or customers, the agreement is likely to have as its object a restriction of competition.763 However, such agreements may not be caught by Article 101(1) at all when it is unlikely that the parties would have been able to enter the market on their own.764 Reciprocal agreements are generally more likely to give rise to competition concerns even when they do not contain explicit restrictions on where and to whom the products may be sold. A reciprocal agreement creates a symmetry in terms of rights and obligations that may easily serve as a means to share markets. When two incumbents appoint each other distributors within the core area served by the other, there is a clear risk that each distributor will make little effort to sell the other supplier’s products765 and that prices will be set so as to avoid direct competition. In the case of non-reciprocal agreements this symmetry is absent which makes it less likely that the incentives of the parties are aligned. Moreover, when a supplier appoints another supplier as his distribu761 Trading at commodity exchanges, for example, and other short-term supply contracts between competitors are unlikely to raise competition concerns. 762 See Commission Decision in De Beers, OJ 2006 L205/24. The Commission accepted commitments whereby the supply relationship would be brought to an end within a period of three years.The decision was upheld by the ECJ in Case C-441/07 P. 763 See Horizontal co-operation guidelines, paragraph 236, Appendix 3. 764 See Horizontal co-operation guidelines, paragraph 238. 765 See in this respect the Commission Decision in Siemens/Fanuc, OJ 1985 L 376/29.

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tor on a non-reciprocal basis it is more likely that the cooperation generates real efficiencies. In non-reciprocal agreements exclusivity is less likely to give rise to significant competition concerns, particularly if the distributor is required to make significant investments and the distributor’s market position is not substantial.766

4.2.1 Market partitioning When the object of an agreement is to share markets, it reduces competition that would have occurred in the absence of the agreement without producing countervailing efficiencies. Market partitioning between actual or potential competitors is therefore a hard-core restrictions of competition.767 Market partitioning can take various forms. An energy supplier may entrust an actual competitor with the exclusive sale and distribution of its products within the same product and geographic market. The parties may agree, for instance, that one takes the northern and the other the southern part of their geographic market. They may also agree to divide up their market by classes of customers, e.g. one sells to local and regional distributors, the other to industrial customers. Market sharing is equally possible between potential competitors: an energy supplier in one Member State may, for example, distribute its products through the incumbent supplier in another Member State instead of entering this market itself. The same is possible for potential competitors currently serving different customer groups, e.g. industrial and household energy consumers. As mentioned, reciprocal distribution agreements are generally more suspect that unilateral distribution agreements. Even in the absence of explicit restraints in the agreement, market partitioning may flow from a concerted practice between the suppliers or an underlying secret agreement. For instance, in SAS/Maersk 768 two airlines had concluded a co-operation agreement which was notified to the Commission and which on the face of it did not give rise to serious competition concerns. However, the parties had also concluded an underlying secret agreement whereby they undertook to share markets by reciprocally abandoning certain routes and leave them to the other. The Commission uncovered this agreement and imposed substantial fines. The finding of a concerted practice or secret cartel is normally derived from circumstantial evidence. Elements of such evidence might be that the parties stop selling into the sales area or to the customer group of the other 766 See in this respect Commission, Notice Guidelines on the application of Article 101 to technology transfer agreements, OJ C101/2 of 27.4.2004, paragraph 164 et seq. 767 See Article 4(c) Specialisation block exemption Regulation. 768 See Commission Decision of 18.7.2001 OJ L 265/15. See also Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF.

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after having concluded the contract or constantly refer interested buyers to each other.769 Similarly, in Power Exchanges the parties engaged in a non-competition arrangement covering all their spot electricity trading services in the EEA and beyond with a view to protecting traditional geographic strongholds.770 The arrangement was established in the context of legitimate cooperation between stakeholders which, in view of the creation of the internal energy market, were requested to find a common technical system for intraday and day-ahead crossborder trading.

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A block exemption regulation creates a legal presumption that a certain category of agreements is compatible with EU competition law. Irrespective of whether the agreement in question actually falls within the scope of Article 101(1), it is presumed to be compatible with Article 101 as a whole. Instead of having to prove in detail any economic benefits of their agreement, the parties only have to show that the conditions for the block exemption apply in case the validity of their contract is questioned. The presumption of legality remains valid as long as the Commission or any Member State competition authority does not formally withdraw the exemption with regard to a particular agreement between individual firms. The authorities can only do so if they show that the specific agreement is caught by Article 101(1) and does not satisfy the conditions of Article 101(3).

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The Vertical Block Exemption Regulation771 covers the following non-reciprocal distribution contracts between competitors:

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–

The supplier is a manufacturer and a distributor of goods, while the buyer is a distributor not manufacturing competing goods, or

–

The supplier is a supplier of services at several levels of trade, while the buyer does not provide competing services at the level of trade where it produces competing services.

These exceptions concern so-called “ dual distribution” where a supplier is distributing its goods and services and at the same time has appointed a distributor 769

The burden to prove market partitioning is on the authority or the plaintiff alleging the market sharing arrangement, see Article 2 Reg.1/2003, Appendix 2. 770 Commission Decision of 5.3.2014, Case AT.39.952 – Power Exchanges. 771 See Article 2(4) of the Vertical block exemption Regulation. See also Horizontal co-operation guidelines paragraph 12, Appendix 3 and Vertical restraints guidelines paragraph 27, Appendix 4.

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to also do so. This means that the distributor has to be a distributor only, i.e. it must not produce energy products competing with the contract products. This group includes, for instance, an electricity generator and distributor commercialising electricity through a competing distributor who is not at the same time a generator. Thus, the agreement is horizontal only at the level of distribution but not at the level of production. However, the agreement is only block exempted if it satisfies the main conditions for exemption, namely that: –

the market share of the supplier does not exceed 30% on the market where it sells energy;

–

the market share of the buyer does not exceed 30% on the market on which it purchases the energy; and

–

the contract does not contain hard-core restrictions, including restrictions on passive sales.772

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The fact that the market share threshold is exceeded does not imply that there is any presumption that the agreement is caught by Article 101(1) or that the conditions of Article 101(3) are not satisfied.773 It merely means that the agreement is subject to individual assessment. It is only when the agreement contains hard-core restrictions that can normally be assumed that it is contrary to Article 101. The competition analysis conducted outside the market share threshold aims at ascertaining whether due to their cooperation the participants are likely to gain, maintain or increase market power, and whether any such adverse effects are likely to be outweighed by the benefits generated by the agreement.

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Restrictive distribution arrangements between major suppliers of electricity or gas will need to generate substantial efficiencies to escape the prohibition of Article 101(1).774 The case has to be made that the distribution of these forms of energy by a competitor demonstrably provides consumers with a new or improved product, greater product variety or leads to cost efficiencies. Prima facie, it does not seem obvious that the distribution of homogeneous products like

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772 See Article 3(1), 4, 5 Vertical block exemption Regulation. 773 See Commission, Guidelines on the application of Article 101(3) paragraph 24, and recital 10 Specialisation block exemption Regulation. 774 The Horizontal co-operation guidelines, paragraph 246, Appendix 3, provide that joint distribution can generate significant efficiencies stemming from economies of scale and scope, especially for smaller producers. Agreements involving smaller producers are also much less likely to significantly restrict competition.

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electricity or gas can meet these requirements except in exceptional cases. Such a case might perhaps exist where green electricity is being distributed by a rival, which does not itself produce such products. Moreover, a distribution co-operation is more likely to generate significant efficiencies under two conditions. Firstly, the co-operation is likely to concern a product or service widely distributed to consumers, and secondly, distribution is likely to account for a high proportion of the total costs of providing the good or service. Applied to electricity or gas, efficiencies are thus more likely to occur in cases where the distribution co-operation does not target industrial but rather household consumers.775 It would furthermore seem that even then the costs of distributing electricity or gas (leaving aside network charges) probably are not significant enough to make up for a high proportion of the total costs. In sum, it is prima facie not obvious that a distribution agreement concluded by competing electricity or gas suppliers is capable of producing substantial efficiencies. Where two incumbents, who hold dominant positions on their respective markets, conclude a unilateral or reciprocal distribution arrangement it is very likely that the negative effects on competition will be such that the conditions of Article 101(3) are not satisfied.

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The assessment under Article 101 depends on the facts as they exist at the time when the assessment is made. The outcome may therefore change over time due to instance to changes in the regulatory environment. This important principle is illustrated by a case in which an independent hydropower generator had appointed, prior to liberalisation, the statutory monopolist in the same geographic market as its exclusive distributor.776 Prior to liberalisation, the monopolist was the only outlet for the generator for the sale of electricity. As a result, the agreement did not restrict any competition that would have occurred absent the agreement. The supplier was entitled to sell neither independently nor through other distributors. However, when liberalisation occurred, the unilateral distribution agreement became a competition issue.777 Two of the principal competitors on the national electricity market were locked into a long-term exclusive distribution contract, which as a result restricted competition. The Commission dealt with the competition problem in the context of a merger proceeding. 775 However, when the parties do not have a significant commonality of variable costs there is less of a risk of a collusive outcome, see Horizontal co-operation guidelines, paragraph 242, Appendix 3. 776 See Commission Decision of 7.02.2001, Case COMP/M.1853 – EDF/EnBW, paragraph 91 seq. 777 The assessment of restrictive agreements under Article 101 is made within the actual context in which they occur and on the basis of the facts existing at any given point in time. The assessment is sensitive to material changes in the facts. This means that Article 101(1) and (3) may become or cease to be applicable due to market developments.

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The proposed merger created competition concerns inter alia because of the said contractual link with one of its few rivals. The merging party holding the exclusive distribution rights undertook to release its rival from its exclusive supply obligation after a transitory period necessary to enable the smaller rival to develop its own sales business and customer base.

4.3 Other cooperations for the commercialisation of energy Apart from joint selling or distribution by a competitor, energy suppliers may also enter into more limited commercialisation arrangements. These other commercialisation cooperations relate to specific marketing functions, such as advertising, promotion, logistics, service or a combination of these.

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These more limited types of co-operation rarely raise serious competition concerns, in particular if only one of these functions is carried out jointly. Pricefixing or market partitioning are normally not the object of such co-operation agreements.778 Usually, the main competition concerns relating to this type of commercialisation co-operation is the disclosure or exchange of sensitive commercial information779 or an increase in the commonality of costs, which may facilitate collusion and soften competition.780

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One of the factors identified in the Horizontal co-operation guidelines that may give rise to competition concerns is a high degree of common costs resulting from agreements between competitors.781 The underlying idea is that when firms have a common cost structure, it is easier for them to come to a common understanding of what is the desirable price which in turn may facilitate collusion. Moreover, a high degree of commonality of costs in itself limits the scope for price competition and may thereby soften competition. Differences in cost levels provide incentives to increase efficiency and to engage in price competition. Agreements which provide for information exchange or which significantly increase commonality of cost may thus give rise to competition concerns.

3.122

However, while cost commonalities may be an issue it is submitted that the exchange of information and the terms and conditions that apply to a cooperation arrangement are likely to be of much more significance than the degree of cost commonality caused by the agreement. For instance, a cooperation agree-

3.123

778 However, where a limited marketing co-operation is a mere disguise for price-fixing or market partitioning it will obviously be treated as a cartel. 779 See Section 1 above. 780 Horizontal co-operation guidelines paragraph 243, 244, Appendix 3. 781 See Appendix 3.

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ment between electricity generators that leaves each generator free to determine where, to whom and at what price to sell its electricity is unlikely to restrict competition even if the agreement creates significant cost commonalities. It may be that the cooperation creates an incentive to raise prices by withdrawing capacity, but it is submitted that any such incentive depends more on the nature of the assets (base load, mid-merit, peak) that the parties have in common than on the absolute level of cost commonalities. In this respect it is interesting to note that in the German Electricity Wholesale Market case782 the Commission took the preliminary view that E.ON and RWE and possibly also Vattenfall were collectively dominant on the German electricity wholesale market due to inter alia to the fact that these three undertakings were linked by networks of agreements on production and wholesale supply. However, the Commission also considered that only E.ON had engaged in the alleged abuse of withholding production capacity. It would thus seem that despite the transparency and presumably also cost commonality created by the network of agreements the Commission did not have sufficient evidence that the allegedly collectively dominant firms had collectively reduced output.

3.124

In order to ascertain whether a limited co-operation in the area of advertising, promotion, logistics or service is compatible with the antitrust rules an analysis of the likely effects on competition on the market has to be carried out. It is thus necessary to examine, first, whether the disclosure of information or increase in commonality of costs is likely to lead to the co-ordination of the parties’ market conduct and second, whether less competition between the suppliers also translates into less competition on the energy market as a whole. This is only likely to be the case if due to the agreement the parties are able to gain, maintain or increase market power. However, even where the parties jointly have a significant degree of market power, competition on the market may not be adversely affected because of the limited scope of the commercialisation agreement. For instance, the joint promotion of gas as a heating fuel is very unlikely to have any negative effects on competition.

3.125

As in the case of distribution agreements between competitors, the Commission facilitates the competition analysis with administrative presumptions. Two presumptions are relevant here. The first presumption is the de minimis rule that also apply to other types of cooperation that do not involve hard-core restrictions.783 Consequently, it is unlikely that the parties to a limited marketing co782 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Electricity Wholesale Market. 783 See Commission, Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) TFEU (de minimis), OJ C368/13 of 22.12.2001.

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operation possess market power if they hold a combined market share of less than 10%. The second ‘negative market power’ presumption concerns cooperations between a large and a small competitor. Even a significant market share (i.e. more than 20%) is normally not indicative of a restriction of competition if one of only two parties has only an insignificant market share and does not possess important resources (“small competitor rule”).784 These two market-share related presumptions do not extend to dominant suppliers. In dominated markets any further reduction of competition caused by the dominant form is likely to quickly become appreciable. A marketing co-operation likely to restrict competition may generate efficiencies outweighing the anti-competitive effects. In order to ascertain whether a prohibition under Article 101(1) can be avoided, the four questions introduced in the previous section dealing with distribution agreements have to be considered here as well (see above, book paragraphs 3.76 et seq.). In conclusion, the practice of the competition authorities appears to demonstrate that there are few cases of a co-operation in the area of advertising, promotion, physical distribution or service, which have been found to infringe Article 101. This not only applies to the energy industry but to all industries in general.

5.

3.126

Production of energy

Co-operation in the area of production is a common phenomenon in the energy industry. Indeed, joint production of power, gas or petroleum products by competing suppliers are among the most, if not the most, frequent category of co-operation found in the energy industry. In general, competition law treats ‘pure’ production joint ventures favourably. The same is true for co-operation agreements to jointly provide services.785 ‘Pure’ means in this context that the co-operation is confined to production of goods or the provision of services. Production arrangements extending to joint selling are dealt with separately (see below, book paragraphs 3.147 et seq.).786 The existence of a safe harbour for certain production joint ventures confirms that up to a certain level of market power production agreements generally produce efficiencies that outweigh any negative effects. The safe harbour has been 784 See Horizontal co-operation guidelines, paragraph 44; Appendix 3, Guidelines for the application of Article 101(3), paragraph 115. 785 See Article 1(f ) Specialisation block exemption Regulation. 786 Service cooperations which are combined with other marketing functions have already been discussed above (see above book paragraphs 3.147 et seq.).

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created by a block exemption regulation that exempts certain production agreements, called “specialisation agreements”, between competitors from the prohibition of Article 101(1). Even if such cooperation agreements may “soften” competition between the parties, they are presumed to generate sufficient efficiencies, e.g. in the form of economies of scale or scope or better production technologies.787 This applies in particular to co-operation agreements significantly increasing production capacity and output for a specific form of energy. Within the scope of the block exemption such efficiencies are presumed to outweigh the possible negative competition effects of such agreements to the extent that they are caught by Article 101(1) in the first place.788

3.129

The application of the safe harbour does not in principle depend on the structure of the arrangement. Hence it is generally not important whether the suppliers agree to share a production facility, for instance through the creation of a joint venture, or enter into a specialisation or subcontracting agreement. In the case of specialisation, they may agree that one party ceases to produce a product and purchases it from the other party (“unilateral specialisation”). They may also agree that both parties cease production of a different product and purchase it subsequently from the other party (“reciprocal specialisation”). Given the reciprocal nature of the latter, there is a greater risk that it leads to the sharing of markets or customers. Subcontracting means that one party entrusts a subcontractor with the task of producing a certain product. The described forms of production cooperations are probably not all equally relevant for all parts of the energy industry. Subcontracting, for example, does not seem to be widely practised in the energy industry and is therefore not addressed in the following sections. Reciprocal specialisation agreements would appear to be only relevant for the petroleum industry.

5.1 Competition issues of production cooperations 3.130

“Pure” production agreements do not have the object of restricting competition provided that the parties only agree on the output directly concerned by the 787 When the parties to an agreement combine their respective assets they may be able to attain a cost/output configuration that would not otherwise be possible. The combination of two existing technologies that have complementary strengths may reduce production costs or lead to the production of a higher quality product. For instance, it may be that the production assets of firm A generate a high output per hour but require a relatively high input of raw materials per unit of output, whereas the production assets of firm B generate lower output per hour but require a relatively lower input of raw materials per unit of output. Synergies are created if by establishing a production joint venture combining the production assets of A and B the parties can attain a high(er) level of output per hour with a low(er) input of raw materials per unit of output. See Guidelines on the application of Article 101(3), paragraph 65. 788 See recital 8 of the Specialisation block exemption Regulation.

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production agreement.789 In the case of joint production the parties necessarily need to determine the production capacity of the joint facility and the allocation of this output between them. In the case of specialisation they need to determine how much they supply each other. These elements are assessed together with all the other competition consequences of a production co-operation.790 The elements of the cooperation that are objectively necessary to the implementation of the co-operation and proportionate to it are treated as being ancillary to it.791 Such elements are assessed under the effects standard.792 However, if the parties agree to restrict output of production facilities which are not jointly operated and which are also not closed or scaled down in the context of a specialisation agreement, such agreement is considered a hard-core restriction of competition.793 The same is true of agreements serving mainly the purpose of fixing prices or partitioning markets,794 and cases where in addition to a bona fide cooperation the parties have also entered into an agreement which serves no other purpose than to restrict competition. For instance, in the E.ON/GDF case795 the parties had jointly constructed a major import pipeline which they operated jointly. This joint venture agreement was pro-competitive in that it paved the way for a major infrastructure investment. However, according to the Commission the parties had also concluded an agreement restricting the sale of the gas transported in the pipeline. GDF agreed not to exit gas in Germany and E.ON agreed not to market its share of the gas in France. This agreement was concluded pre-liberalisation and was legal at the time. However, the agreement was allegedly continued post-liberalisation at which point it became restrictive of competition. The Commission treated this arrangement as a separate hard-core restriction and imposed high fines. The assessment of bona fide production joint ventures are assessed under the effects standard. As a result, they are only caught by Article 101(1) when they have likely negative effects on competition and consumers. In the Guidelines on horizontal cooperation agreements the Commission focuses on the direct impact of the joint determination of output levels, the exchange of commer789 See Horizontal co-operation guidelines, paragraph 160, Appendix 3, and Article 4(b) Specialisation block exemption Regulation. 790 See Horizontal cooperation Guidelines, paragraph 161, Appendix 3. 791 See e.g. Case C-382/12 P, Mastercard, ECR 2012, I page 0000, para. 89. 792 The only exception is where the agreement is a sham and merely intended as a cover up for an underlying cartel. Such cases are rare in practice. 793 See Article 4(b) Specialisation block exemption Regulation. 794 See Article 4 Specialisation block exemption Regulation. 795 See Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF. See also Commission Decision of 5.3.2014, Case 39.952 – Power Exchanges.

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cially sensitive information and whether the agreement leads to a high degree of commonality of costs. These elements seek to determine whether the agreement allows the parties to obtain, maintain or enhance market power. In many ways production agreements resemble mergers, with the difference that a merger provides for a more far-reaching degree of integration. It therefore makes sense to ask how the cooperation would have been assessed under the Commission’s horizontal merger guidelines796 and then take account of the specific features of the cooperation that distinguish it from a merger.797

3.133

For instance, when two or more generators jointly construct and operate a new power plant, it is necessary to carefully analyse the parties’ joint market position and the cooperative framework created by the agreement. In particular, it is relevant to assess whether the agreement provides for joint decisions-making regarding production levels, planning of outages etc. which may allow the parties to jointly exercise market power. The Commission’s decision in the German Electricity Wholesale Market case is illustrative in this respect even if it involved alleged abuse of dominance.798 In this case a generator with a market share of approx. 25% allegedly withdrew available generation capacity from the market in spite of the fact that it was economical to run this capacity. In other words the generator allegedly exercised market power.799 As a result it was necessary to have recourse to more expensive plants in the merit order to satisfy demand which led to an increase in wholesale market prices. Parties to a production joint venture may be able to jointly exercise market power in a similar way by collectively deciding to reduce output or plan outages during periods when demand is high800. However, the incentive to engage in such conduct will depend inter alia on the nature of the jointly operated capacity. It is submitted that if the parties jointly operate generation capacity with low marginal costs such as nuclear plants, they will have limited incentives to withdraw capacity because the cost of doing so is likely to be high compared to other generation resources held by 796 See Commission, Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C31/5 of 5.2.2004. 797 See in this respect Horizontal co-operation guidelines, paragraph 21, Appendix 3. 798 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Electricity Wholesale Market. 799 A similar analysis was conducted in the Commission’s Decision of 22.12.2008 in Case COMP/M.5224 EDF/British Energy. 800 The Swedish Competition Authority has argued that the co-ownership of the Member State’s nuclear plants should be broken up, see 2008.09.12, DNR 500/2008. The Swedish nuclear plants are jointly owned by three operators. The Swedish competition authority voiced concern that due to their cooperation the parties would exchange sensitive information and jointly decide on the operation of the plants, which might allow them to jointly exercise market power. However, it is not clear that there is any incentive to withdraw nuclear capacity since they have low marginal costs and are designed to run as base load plants. They are therefore costly to withdraw.

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each of the parties. The risk is higher if the parties jointly operate generation capacity with relatively high marginal costs. By withdrawing this capacity they may be able to significantly influence prices and share the relatively lower cost of doing so. Competition concerns are also likely to arise when the parties are restricted in the sales of their share of the output, i.e. to whom, where and at what prices they sell, or in their ability to launch similar projects either on their own or with other partners. Such restrictions which go beyond the co-operation in the field of production are considered to have as their object to restrict competition.801 The parties will have to show that such restrictions are nevertheless necessary in order to achieve the benefits of their cooperation.

3.134

Competition concerns may further arise where the parties exchange commercially sensitive information. Where the exchange is limited to information that it necessary for the proper functioning of the joint production arrangement, the information exchange is assessed together with the rest of the agreement. Such exchanges are more likely to be compatible with Article 101 than exchanges that go beyond what is necessary for the joint production of the products covered by the agreement.802 Exchanges that are ancillary to the joint production benefit from the efficiencies as a whole whereas in the case on non-ancillary exchanges it is the information exchange that must generate the countervailing efficiencies.803

3.135

Competition concerns may further arise when the parties have a significant degree of market power and the agreement creates a high degree of commonality of variable production costs.804 A substantial degree of commonality of costs is likely to arise under two conditions:

3.136

(1)

Variable production costs accounts for a high proportion of the total costs of the energy product, and

(2)

Suppliers combine their production activities to a significant extent.

801 See Horizontal cooperation guidelines, paragraph 160, Appendix 3. The focus on variable costs is due to the fact that these are generally the costs that have the most direct impact on pricing decisions, see Guidelines on the application of Article 101(3), paragraph 98. 802 See Horizontal co-operation guidelines, paragraph 182, Appendix 3. 803 See in this regard Commission Decision of 18.6.2012, Case COMP/39.736 – Siemens/Areva, paragraph 82. 804 See Horizontal cooperation guidelines, paragraphs 168, 178, Appendix 3.

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3.137

The higher the degree of commonality of variable costs, the greater is the intrinsic limitation of the parties’ scope for independent behaviour in terms of price competition.805 Moreover, symmetrical cost structures may facilitate tacit collusion. This is particularly true for homogeneous products like energy. Where variable production accounts for almost all costs of the final product and the suppliers co-operate for all their production, the suppliers’ scope for price competition is much more limited than in the situation where the suppliers have only a small proportion of their total costs in common.

3.138

The Commission does not directly address the question when cost commonalities are sufficiently high to create competition concerns. It can, however, be inferred from the examples given in the Guidelines at which point cost commonality reaches “critical levels”. According to the Commission the scope for price competition is likely to be significantly reduced when the parties share all or most of their variable costs.806 It is important to note that ‘costs’ in this context means the input costs to the parties and not the production costs of the joint entity. The parties may achieve a high degree of commonality of costs and price co-ordination by increasing the transfer price between the joint entity and the parents. This is particularly true for variable cost components that can normally be presumed to feed directly into selling prices.807

3.139

Motor-fuel bought ex-refinery probably accounts for a high proportion of the total costs of motor-fuel sold to motorists at petrol stations. A co-operation of motor-fuel vendors providing for the joint refining of all their requirements may thus be apt to create a high degree of cost commonality and dampen price competition between them. However, if their agreement provides that each partner has to procure the crude oil independently and to cover only the refining costs for its own requirements, the parties may only have few costs in common and price competition between them may not at all be negatively affected provided that transfer prices are cost reflective. Two general conclusions might be drawn from this example. Each production co-operation has to be assessed on its own merits and, where it raises a competition problem, alternative arrangements may be available to either solve the problem completely or, at least, reduce the negative competition impact through modifications of the original co-operation agreement. 805 See Horizontal co-operation guidelines, paragraphs 36, Appendix 3. A similar restraining effect on the collaborators’ market conduct may also occur where the jointly manufactured good is an intermediate good which is a key component for a final product, see Horizontal cooperation guidelines, paragraph 179. However, this “qualitative commonality” does not seem to be very pertinent for energy production. 806 See Horizontal co-operation guidelines, paragraphs 107, 108, Appendix 3. 807 See Horizontal co-operation guidelines, paragraph 174, Appendix 3.

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5.2 Safe harbour for production cooperations The Specialisation block exemption Regulation provides a safe harbour for production cooperations between competitors. Agreements covered by the block exemption are presumed to be valid and fully compatible with Article 101.

3.140

For the purposes of the block exemption, ‘production’ is defined as the ‘manufacture’ of goods or the provision of services.808 This definition includes electricity. It also includes co-operation agreements relating to the extraction and processing of natural resources like oil and natural gas.

3.141

The safe harbour of the Specialisation block exemption Regulation is based on a market share threshold and certain conditions concerning the content of the agreement. The first condition is that the participants’ combined market share does not exceed 20% in the market directly concerned by the co-operation.809 The market shares are calculated on the basis of the value of the products sold in the preceding calendar year.810 The sales of all companies belonging to the same group to each of the collaborating firms have to be included in the calculation (“connected undertakings”).811

3.142

The second condition concerns the content of the agreement. It must not contain any of the three hard-core restrictions: price-fixing, output limitation or allocation of markets or customers (so-called hard-core restrictions). If there are one or more hard-core restrictions in the production agreement the benefit of the safe harbour is lost.812 Importantly, however, the hard-core list is fairly narrowly defined. It does not apply to provisions on the agreed amount of products in the context of unilateral or reciprocal specialisation agreements or the setting of the capacity and production volumes in the context of a joint production agreement.813 Such agreements are also not considered to have as their object to restrict competition.814 It is not possible to engage in joint production with out agreeing on how much to produce.

3.143

Outside the safe harbour individual assessment is required. The Commission Guidelines on horizontal co-operation agreements provide that generally, a pro-

3.144

808 809 810 811 812 813 814

See Article 1(f ) Specialisation block exemption Regulation. See Article 3 Specialisation block exemption Regulation. See Article 5(b) Specialisation block exemption Regulation. See Article 1(2) and 5(c) Specialisation block exemption Regulation. See Article 4 Specialisation block exemption Regulation. Id. See Horizontal co-operation guidelines, paragraph 160, Appendix 3.

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duction agreement is more likely to lead to restrictive effects on competition in a concentrated market than in a market which is not concentrated. Similarly, a production agreement in a concentrated market may increase the risk of a collusive outcome even if the parties only have a moderate combined market share.815 If one of just two parties has only an insignificant market share and if it does not possess important resources, even a high combined market share normally cannot be seen as indicating a likely restrictive effect on competition in the market.816

3.145

In the analysis of whether the parties to the agreement have market power the Commission also takes into account the number and intensity of links (for example other cooperation agreements) between competitors in the market.817 Such links, which are common particularly in the electricity sector, may facilitate collusion by aligning incentives and increasing transparency. It is not clear, however, when links raise competition concerns. The Commission mentions a hypothetical example where two firms each with 15% market form a production joint venture and one of the parties already has a joint production plant with a competitor with 25% market share.818 The Commission takes the view that this cooperation increases the risk of collusion and as a result is likely to have restrictive effects on competition. It is submitted that in the real world such superficial analysis is insufficient to find an infringement of Article 101(1). Many sectors are characterised by overlapping joint ventures, yet the Commission has intervened only rarely. Joint production agreements are likely to be efficiency enhancing. For instance, when two generators jointly build a new power plant, more efficient capacity is put on the market. In such circumstances it takes more than theoretical arguments based on economic links to strike down the agreement. It is submitted that a competition authority would have a show that due to the production capacity which the various parties have in common they have the ability and incentive to exercise market power819. Moreover, when there are significant efficiencies competition authorities are unlikely to prohibit such cooperation, particularly when investments and risks are high. In stead, where competition concerns arise they are likely to seek remedies that limit the competition concerns and at the same time ensure that the project is maintained.

3.146

The Commission found, for instance, strong links between competitors in the UK upstream gas sector when examining a merger between two gas companies. In order to spread risks, companies tended to enter into numerous single 815 816 817 818 819

Paragraph 170. Horizontal co-operation guidelines, paragraph 44, Appendix 3. Horizontal co-operation guidelines, paragraph 172, Appendix 3. See Horizontal cooperation guidelines, paragraph 188, Appendix 3. See in this respect Commission Decision of 22.12.2008, Case COMP/M.5224 – EDF/British Energy.

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or multiple function cooperations with regard to gas exploration, development, production, processing and transport. As a result, most of the important decisions within joint ventures operating in the UK required unanimity from all partners in the project. Partners could exercise a right of veto to block a decision, which was not in their interest. The Commission concluded that these veto rights not only facilitated collusion, they also allowed a single player holding stakes in several joint ventures to veto decisions against its commercial interest. Since the merger would create a new largest player with stakes in the majority of cooperations agreements, the Commission considered that a dominant position would be created.820 Similarly, in German Electricity Wholesale Market the Commission took the preliminary view that two and possibly three of the main German generators held a collective dominant position inter alia due to the fact that they were linked by networks of production and wholesale supply agreements.821 The analysis of production joint ventures focuses primarily on the directly affected product and geographic market. This is the market on which the co-operating parties offer and sell the energy produced jointly. When one of the parties is a potential entrant competition concerns are particularly likely if actual competition in the incumbent’s market is already weak and the threat of entry is a major source of competitive constraint.822 In a few cases it may be necessary to extend the analysis to markets which are closely related to the aforementioned energy market because the cooperation leads to so-called spill-over effect.823 Cooperation in one market may influence the parties’ competitive behaviour also in another market. For instance, two petroleum suppliers jointly refining motorfuel for their own requirements may decide to improve their market position on downstream retail markets through co-ordinating their market conduct there. Competition may also soften due to the fear that aggressive behaviour in another market will destabilise the joint venture and negatively affect the profits that it generates. The significance of the joint venture to the overall profitability of the parties is thus of significance. Spill-over effects are most likely to occur in markets related to or showing some interdependencies with the market on which the joint venture operates. Interdependencies are thus in general likely to occur on downstream, upstream or neighbouring markets. They are particularly probable where there exist strong links between firms because of the vertical integration of some suppliers. Another condition for spill-over effects is that 820 See Commission Decision of 19.01.2001, Case COMP/M.1532 – BP Amoco/Arco, paragraph 60 seq. 821 See Commission Decision of 26.11.2008, Case COMP/39.388 – German Wholesale Electricity Market, paragraph 18. 822 See Horizontal co-operation guidelines, paragraph 166, Appendix 3. 823 See Horizontal co-operation guidelines, paragraph 156, Appendix 3.

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the parties enjoy a market position on the related market which confers them a significant degree of market power.824 It would thus be unlikely that the two petroleum suppliers mentioned in the example above consider aligning strategies if they together enjoyed insignificant market power on the retail market. Even if they aligned their strategy, it would have no market impact.

3.148

In the probably rare event that a production co-operation has the effect of appreciably restricting competition either on the directly affected or on a spill-over market, the efficiency defence can still avert the prohibition of the arrangement. It is up to the suppliers to invoke the defence and prove that its conditions apply.825 In order to find out whether the defence applies, the same four questions have to be asked for a production co-operation as for distribution by a competitor (see above, book paragraphs 3.76 et seq.).

3.149

The assessment of production joint ventures is illustrated by the Synergen Case, which involved a production co-operation agreement to which a dominant energy supplier was party. An incumbent generator and Statoil, a major gas supplier, had agreed to jointly construct and operate a new power plant in Ireland (“Synergen”).826 The generator would supervise generation and market all the power produced by the joint venture for a period of 15 years, whereas the gas supplier would mainly supply the gas for the same period of time.

3.150

The Commission established that the incumbent generator held a dominant position on the liberalised markets for the wholesale of electricity (97% market share) and for electricity sales to eligible customers (market share exceeding 60%). Statoil was found to be one of the few realistic potential competitors of the incumbent with gas reserves inside and outside of Ireland, electricity activities in other countries, as well as an established brand name in Ireland and significant financial resources. The production arrangement with the dominant supplier was likely to end Statoil’s ambitions to enter the market independently. It therefore restricted the newly emerging potential competition. The restriction was found to be appreciable despite the fact that a Northern Irish supplier was already committed to enter the Irish Republic’s electricity markets with a new power plant. The Commission’s analysis came to the conclusion that the Northern Irish entrant and the incumbent would be in a situation of mutual deterrence. Aggressive competition by the entrant would likely trigger retaliation in 824 Id. 825 See Article 2 Reg. 1/2003, Appendix 2. 826 The project did not constitute a full-function joint venture despite the fact that a new legal entity was created because of the considerable direct involvement of the two stakeholders in the business activities of Synergen.

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the entrants market in Northern Ireland. As a result, the Commission took the view that the new entrant unlikely to compete aggressively. The project was nevertheless cleared by the Commission after having received commitments. The incumbent generator undertook to auction, and Synergen committed to sell through bilateral contracts, electricity to competitors amounting to 50% of the volume of the eligible customer market until another new power plant of a certain minimum size came on stream.827 The clearance despite the dominant position of one of the parties and the negative impact on potential competition, illustrates the fact that competition authorities are reluctant to prohibit arrangements that result in significant investments in new capacity. Authorities run the risk that the project will not be continued by one of the parties if the cooperation is prohibited. As consumers are likely to be better off with the project than without it, there is a clear incentive to look for remedies that seek to address the competition concerns while maintaining the cooperation.

6.

3.151

Production and sale of energy

In the previous sections the competition concerns typical for a co-operation with the single function of either production or commercialisation have been discussed. However, energy suppliers sometimes also collaborate with regard to both production and commercialisation, the latter either in the form of joint selling or distribution by a competitor. In this situation all previously mentioned competition considerations have to be checked cumulatively.828 However, where the assessment differs according to the nature of the co-operation, a ‘centre of gravity’ approach is applied. This means that the entire co-operation is assessed on the basis of the principles that apply to the type of cooperation that forms the centre of gravity of the agreement.829

3.152

Co-operation agreements enabling competing energy suppliers to jointly produce and sell into a new market into which they could not sell alone do not raise competition concerns unless they give rise to spill-over effects.830 In other cases

3.153

827 See Commission Competition Report 2002, p. 192 seq. 828 A co-operation comprising production and commercialisation in the energy industry may constitute a fullfunction joint venture. This is particularly likely if two or more competitors create an entity carrying out joint production and selling, see Horizontal co-operation guidelines, paragraph 6, Appendix 3. For fullfunction joint ventures in general see below paragraphs 4.9-4.11. 829 See Horizontal co-operation guidelines, paragraph 13, Appendix 3. 830 See Guidelines on the application of Article 101(3), paragraph 18(a), and Horizontal co-operation guidelines, paragraph 237, Appendix 3.

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competition concerns may arise. The concerns are the same as for other cooperation arrangements, namely that the parties are able to obtain market power or increase it.

3.154

The joint determination of prices is the principal competition concern of all joint selling arrangements. As has already been explained, price fixing normally constitutes a hard-core restriction of competition. However, in the context of joint distribution and joint production extending to joint distribution the Commission block exempts up to the market share threshold of 20% the joint fixing of prices charged to the immediate customers.831 Sham production and commercialisation cooperations do not benefit from this approach irrespective of whether the sole purpose is to restrict competition or this is a distinct and separate objective.832

3.155

Outside the block exemption a case-by-case analysis of the agreement is required. The Commission in principle considers price fixing associated with joint production and distribution a restriction by object unless the restriction is necessary in the sense that the parties would not otherwise have an incentive to enter into the production agreement in the first place.833 However, the Commission also takes the view that joint distribution agreements for products which have been jointly produced are generally less likely to restrict competition than stand-alone joint distribution agreements.834 Since agreements that have as their object to restrict competition are deemed to have restrictive effects it may be that the Commission believes that it is still required to carry our an analysis of the likely effects before finding that production agreements which extend to joint distribution are caught by Article 101(1). This would also be consistent with the judgment in Groupement des Cartes Bancaires.835 The European Court of Justice made clear that for an agreement to restrict competition by object it must by its very nature be harmful to the proper functioning of normal competition. It is submitted that there is no basis for assuming that joint production and distribution adversely affects competition. Assessment of the likely effects on competition is required. The Commission should not use a purely legal construct to impose on the parties to show countervailing efficiencies without first having made a case that the agreement adversely affects competition. The Commission has dealt so far with two cases of joint production and commercialisation of energy suppliers after liberalisation. Both cases involved gas. 831 832 833 834 835

See Article 4 Specialisation block exemption Regulation See in this regard Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF. See Horizontal co-operation guidelines, paragraph 160, Appendix 3. See Horizontal co-operation guidelines, paragraph 167, and paragraph 3, Appendix 3. Case C-67/13 P, Groupement des Cartes Bancaires, ECR 2014, p. I-0000.

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6.1 The Corrib case This case involved a situation typical for the upstream sector of the European gas industry. Gas companies usually collaborate in the exploration, development and production of gas, mostly in the form of field-specific cooperations, in order to diversify risk. In this particular case four gas companies planned to jointly market the gas they had discovered in a gas field off the West Coast of Ireland after it had been declared commercial. They explained to the Commission that they would have to sell jointly in the first five years to balance the countervailing purchasing power of the two incumbent Irish gas purchasers (a distributor and a generator).836 The Commission did not accept the buying power reasoning of the producers due to the intensity of the restriction. Moreover, the envisaged joint selling ran counter to the liberalisation efforts of the EU. The Commission emphasised this element in its published reports on the case when stating that an increasing number of gas consumers will soon become “eligible” through the openingup of the gas markets, i.e. gas customers will become free to choose between suppliers. It pointed out that energy-intensive industrial consumers in Ireland would be looking for alternative offers. In addition, the growing Irish electricity market would provide opportunities for new gas-fired power plants being built by market entrants. Also the request for a temporary exception was rejected by the Commission. Given the background of this case it is reasonable to assume that the Commission is unlikely to accept joint selling by significant suppliers in the gas industry unless compelling reasons are provided as a justification. The argument that joint selling is needed to acquire countervailing power is highly unlikely to be accepted since it is due to the very fact that joint selling creates market power that it is considered problematic.

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Another argument that might have been introduced in this case is that joint selling is needed because purchasers may not be interested in buying the exact quantity of gas produced from the field by any given owner offering gas on an individual basis. Large purchasers may want a single price and a single contract for ease of negotiation and administration. While this argument may have some merit, it must be analysed whether volume issues can equally be resolved through the aggregation of gas within the overall portfolio of individual participants. Most gas companies own shares in more than one single gas field. However, if

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836 Should the parties also have made the argument that it is for technical reasons impossible to individually market jointly produced gas, those familiar with the gas industry would probably have retorted that this technical problem can be solved through lifting and balancing agreements.

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the alternative is to sell to a larger producer, joint selling by a group of smaller producers may be pro-competitive where it allows the latter to impose a more effective competitive constraint on the former.

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Sometimes gas fields are developed under so-called production sharing agreements whereby the parties and the local government conclude an agreement for the exploitation of the field. Under such agreements the output is shared under a formula that first allows the parties to recover their investment costs. During this period they receive a higher share of the output. Subsequently, the government’s share of the output increases. The duration of the initial period depends on the selling price. Under such agreements it may be difficult for the parties to know with certainty the volumes of gas available to them and thus what is available for sale. However, such difficulties might be addressed through aggregation and optimisation within the overall portfolio. If this is not possible, joint selling may be required to create a marketable product. The parties market position compared to competitors that are not party to the cooperation is also relevant to the assessment. When the parties face strong competitors the cooperation will more quickly be viewed favourably because it may help the parties compete more effectively with their larger rivals.

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In the 1970s, three gas producers formed the Danish Underground Consortium (DUC), with the aim of jointly producing gas found in the Danish continental shelf. All gas produced by DUC was sold to the Danish gas wholesaler and exporter DONG. The terms and conditions of the gas supply contracts were negotiated jointly each time by the DUC partners and DONG, but subsequently entered into individually by each DUC party. The DUC partners defended their joint marketing activity by invoking the Specialisation block exemption Regulation and the special “ joint distribution exception” from the hard-core prohibition of price-fixing in particular.

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The Commission did not agree that the block exemption Regulation applied to the case. Irrespective of whether the DUC agreement could be characterised as a specialisation agreement falling under the Specialisation block exemption Regulation, the Commission took the view that the conditions for the joint distribution exception were not satisfied. The collective negotiation by the DUC members amounted in the eyes of the Commission to “ joint co-ordination of sales” rather than “ joint distribution” under the Regulation. The Commission furthermore assumed that the collective negotiations restricted competition 208

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without generating any countervailing benefits. While the agreement also covered joint production and thus did provide for an integration of economic activity, the addition of joint selling was not considered necessary for the proper functioning of the production joint venture and did not produce efficiencies of its own. For this part of the co-operation there was very little integration of economic activity. Moreover, collectively the parties had a strong position on the market implying that joint selling did contribute to the creation or strengthening of market power. Whilst reserving their legal position, the DUC partners agreed to discontinue their joint marketing activities for un-contracted gas produced on the Danish continental shelf. They undertook to market all gas in future individually. They also agreed to independently carry out negotiations concerning existing contracts when prices would be reviewed. Finally, they promised to offer for sale 7 billion cubic meters of gas to new customers. Taking into account these commitments, the Commission closed its investigation against the DUC partners.837 The informal settlement of this case resembles the compromise solution found in the GFU case mentioned earlier. The Commission was again ready to let the past remain untouched (by not unravelling existing long-term gas contracts) in exchange for the possibility to develop gas-to-gas competition through the sales of a specified volume of gas to customers other than the traditional clients.

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The DUC case demonstrates that not every small marketing activity, be it exploration, discussion or negotiation suffices for a co-operation to be labelled “ joint distribution”. Real and significant integration of economic activity is required. Otherwise the hard-core rule on price-fixing could be avoided too easily. From an economic viewpoint the basis for distinguishing could perhaps be found in the risk element. A joint venture bearing all commercial risks of selling its goods is likely to have fully integrated the sales function with the production function. In contrast, where shareholders become the owners of the jointly produced products before they are marketed, they assume all the commercial risks of selling such products. In these circumstances joint selling serves merely to coordinate the commercial conduct of the parties. The main purpose of Article 101(1) is to prevent such co-ordination.

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837 See Commission Competition Report 2003 p. 31; press release IP/03/566; Schnichels/Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DUC/DONG case in: Competition Policy Newsletter 2003 (2) p. 60 seq.

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Construction, ownership and exploitation of energy infrastructure

Co-operation agreements in the area of infrastructure play an important role in particular in network industries such as electricity and gas. Infrastructure owners often co-operate in the construction, ownership and exploitation notably of costly sub-marine cables and inter-connectors838 or gas pipelines, storage and LNG terminals. The Commission Guidelines do not expressly mention this type of co-operation. However, it is reasonable to assume that the competition analysis of infrastructure co-operation agreements follows in principle the pattern of production cooperations and, in case the exploitation of the infrastructure forms part of the agreement, the pattern of production and commercialisation cooperations. Consequently, many infrastructure cooperations will be compatible with EU competition law and may actually foster energy competition. This is notably true for arrangements establishing new network links or increasing transmission capacity of congested existing infrastructure between Member States, central and peripheral markets of the EU or with important energy exporting countries. Consumers on related energy markets are very likely to benefit from these projects in terms of enhanced energy competition and security of supply.839 The few energy infrastructure cases examined under the EU competition rules by the Commission after liberalisation, notably the UK – Belgium Interconnector and Viking Cable projects, appear to confirm this. It was through a co-operation amongst gas companies that the United Kingdom – Belgium sub-sea gas interconnection was built, linking for the first time the gas markets of the UK and the Continent through a high-pressure gas pipeline. It had the immediate effect, at the time of ample UK gas resources, of increasing the number of potential competitors, which could enter the Continental gas markets. The submarine cable project of Norwegian and German operators, the so-called Viking Cable, would have reinforced the existing links between the hydropower dominated Scandinavian countries with the primarily thermal power areas of the Continent, if it had been built after the clearance of the Commission.840 838 An interconnector is equipment used to link electricity systems, see Article 2 No 13 Gas Liberalisation Directive 2003. 839 See in this respect Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity, paragraph 9. The document is available at http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/sec_2009-642.pdf. 840 See Commission, Competition Report 1995, p. 125 seq. and Commission, Notice pursuant to Article 19(3) of Reg. 17 concerning Viking Cable, OJ C 247/11, 5.09.2001; see also Commission press release, “Role of interconnectors in the electricity market. A competition perspective”, MEMO/01/76 of 12.03.2001.

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Although most infrastructure joint ventures are unlikely to infringe EU competition law, a competition analysis of each individual co-operation will often be required. This is particularly true when the projects are brought forward by undertakings which individually or collectively have a strong position on the market. The analysis may have to tackle all main issues discussed in the previous sections and, moreover, examine effects on competition at two levels: the market for the exploitation of the infrastructure and the related energy markets. In addition, it is necessary take into account whether the cooperation extends into joint purchasing. For instance, in the case of a projected new gas pipeline, the parties may jointly purchase the gas to be transported in the pipeline. Such arrangements may give rise to foreclosure concerns.841 If gas in a given region is in tight supply joint purchasing agreements imposing long-term exclusive supply or volume obligations may exclude competing projects. It is submitted, however, that this is the case only where the volume requirements exceed what is required in order to for the investment to be made. An investment is viable only if there is sufficient demand for the new capacity which in turn requires availability of gas. Joint purchasing may be an appropriate way to underpin the joint investment.842

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New energy infrastructure projects may also raise particular regulatory issues, notably regarding possible exemptions from regulated third party access.843 The liberalisation directives provide for a special exemption procedure for infrastructure projects whereby the promoters of the project may apply to national regulators for an exemption from third party access to the new infrastructure. The decision of national regulators is subject to Commission oversight. The test laid down in the directives is in many respects a competition test requiring that the project must improve competition on the market.844 This means that in the

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841 See Horizontal co-operation guidelines, paragraph 200, Appendix 3. Joint purchasing may also give rise to collusion concerns if the parties have market power in the markets where they sell the jointly purchased products, see Horizontal co-operation guidelines, paragraph 200 seq. 842 Once a project has secured the necessary supply to underpin it, there may be insufficient supply to underpin other projects. However, this market outcome is not the result of a restriction of competition but scarcity of supply. The agreement does not exclude any competition that would otherwise have occurred since there is room for only one project. In that case there is no basis for intervening, see Guidelines on the application of Article 101(3), paragraph 18(a). Article 101 aims at preventing restrictions of competition and not at allowing competition authorities to pick winners in a competitive process. 843 See Volume I EU Energy Law. 844 See e.g. Article 36 of Directive – 2009/73/EC OJ L 211/94 of 13/07/2009. The condition for exemption did not change compared to Article 22 of the previous directive and are the following: (a) the investment must enhance competition in gas supply and enhance security of supply; (b) the level of risk attached to the investment is such that the investment would not take place unless an exemption was granted; (c) the infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built; (d) charges are levied on users

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case of new infrastructure projects the competition analysis will often be carried out ex ante under the directives rather than ex post under Article 101. However, it is important to note that the test under the directive is less flexible. It is a condition that the risks are such that the investment would not take place absent the exemption. Under Article 101 this is not required in order to conclude that on balance the agreement is pro-competitive. It is merely required that the agreement with a given restriction produces more efficiencies than without it and that the benefits outweigh the adverse effects.

7.1 Merger or antitrust law? 3.169

Before a full competition analysis of infrastructure cooperations can be undertaken it has to be clarified whether antitrust or merger law applies to an individual project. Multiple-function cooperations encompassing the construction, operation and exploitation of a facility may not be subject to antitrust but to merger law. This applies notably to infrastructure cooperations in the form of joint ventures destined also to market capacity to all interested third parties. Such multiple-function cooperations are very likely to constitute a full-function joint venture. If, however, each of the parties to the agreement envisage, for example, to individually market the jointly owned capacity or the infrastructure, the co-operation has the sole purpose to serve the energy business of the parties and antitrust and not merger law will therefore apply.845

7.2 Hardcore restrictions 3.170

The first issue to examine when carrying out the antitrust analysis of an infrastructure joint venture is the existence of possible hard-core restrictions. If the capacity is allocated to each party and they agree not sell their share to third parties, such restraint is likely to be considered a restriction by object and possibly even a hard-core restriction unless the restraint is objectively necessary in order for the infrastructure to be built. This is more likely to be the case when the parties are producers and resellers as opposed to being only producers or of that infrastructure; (e) the exemption is not detrimental to competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected. The Commission has provided guidance on the application of the exemption procedure in Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity. The document is available at http://ec.europa.eu/ energy/sites/ener/files/documents/sec_2009-642.pdf. 845 See book paragraph 4.30 et seq. for a more in-depth discussion of what constitutes a full function Joint Venture.

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traders.846 It would also be a hard-core restriction if the parties were to agree on the price at which they individually sell to third parties or where or to whom they sell.847 On the other hand, for an infrastructure co-operation to function, the parties have to discuss and agree on the size of the facility’s capacity. The same is true for the setting of sales targets and the fixing of prices if the parties are also jointly selling the capacity to interested customers. Although price and output fixing are in principle hard-core restrictions, they are assessed as part of the overall cooperation if they are objectively necessary for the functioning of the co-operation.848 This does not imply that such restraints are not caught by Article 101). It does mean, however, that the parties can invoke the efficiency defence of Article 101(3) and that the cooperation is prohibited only where the negative effects outweigh the positive effects. In the UK–Belgium Interconnector case the Commission accepted joint marketing of the rights to the transport capacity the 9 partners had obtained through prior agreements with their joint venture Interconnector UK Ltd. The joint selling would, however, only occur in limited circumstances.849 On the other hand, in the E.ON/GDF case the Commission adopted a prohibition decision with very high fines in respect of an alleged agreement between two owners and operators of a major gas pipeline whereby they agreed not to use the gas transported in the jointly owned pipeline to compete in each other’s home markets.850 Thus, the agreement related to the commercialisation of the gas transported in the pipeline. It was unrelated to the operation of the jointly owned assets. As a result there was no basis for arguing that the restrictions formed part of the joint operation of the pipeline.

7.3 Analysis of likely effects of infrastructure cooperations Absent hard-core restrictions the likely effects of the agreement must be analysed either under the effects standard or for restrictions by object in the context of the efficiency defence unless the safe harbour of the Specialisation block exemption Regulation applies. The safe harbour exempts not only the joint production of goods but also the joint provision of services. Since granting access to a piece of infrastructure is a service, the safe harbour also applies to infrastructure joint ventures. However, the benefit of the block exemption may be limited in practice since it is a condition that the parties hold less than a 20% share on the relevant market. In some cases the relevant market will be identical with 846 In the former case the parties may have little incentive to make the investment if the infrastructure cannot be used exclusively or at least mainly to serve their mutual supply relationship. 847 See Article 4 Specialisation block exemption Regulation. 848 See e.g. Case C-382/12 P, Mastercard, ECR 2012, I page 0000, para. 89. 849 See Commission, Competition Report 1995, p. 125 et seq. 850 See Commission Decision of 8.7.2009, Case COMP/39.401 – E.ON/GDF.

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the facility itself, i.e. the marketable transmission capacity of an interconnector linking two distinct networks. In other cases relevant markets are wider than the facility operated by the parties where there exist competing infrastructures, such as gas pipelines or LNG terminals, which can be used for transmitting energy to the same relevant geographic market. Moreover, for the market share threshold to be satisfied such additional infrastructure must be controlled by other parties.

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Unless the safe harbour applies, the competition analysis must answer the two principal questions, (i) does the co-operation lead to the co-ordination of the competitive conduct of the co-operating parties and, (ii) do the collaborators gain, maintain or increase market power through the co-operation? Two distinct scenarios can be identified in this respect: (i) the collaborators intend to open up their infrastructure to all interested third parties, or (ii) the collaborators intend to use the infrastructure only for their own requirements.

7.3.1 Cooperations granting third party access to infrastructure 3.173

Where the infrastructure in question is subject to a regulated third party access system, which imposes tariffs so that the parties have no scope for fixing prices when exploiting the capacity of their jointly owned facility, the competition analysis is rather simple. However, this requires the finding that the applicable regulation fully and comprehensively controls tariffs and terms for accessing the infrastructure of the co-operation, to ensure that they are transparent and nondiscriminatory. For the following discussion it will be assumed that regulation does not prevent restrictions of competition through effective regulated third party access or does not even apply to the jointly owned infrastructure, as it may for instance be the case for so-called merchant infrastructure and cross-border transmission lines.851

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Participants in infrastructure joint ventures inevitably incur a high degree of cost commonality. This applies even to co-operation agreements limited to the construction and operation of a facility because the cost of constructing, maintaining and operating the facility will normally be significantly higher than the expenditure for the marketing of capacity rights. Commonality of costs is therefore a relevant factor, which may facilitate tacit collusion where the capacity is marketed independently by the parties. The cooperation may also lead to spill-over effects in down-stream supply markets. The main risk is that the joint venture allows the 851 In cases where the Commission accepts that an exemption is granted from regulated third party access for new infrastructure (see EU Energy Law, Volume I), the granting of such an exemption pursuant to e.g. Article 36 of the third Gas Directive does not provide any legal immunity from the competition rules.

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parties to exchange detailed data on capacity utilisation, which in turn allows them to monitor each others’ sales on the downstream market. Another important factor for finding co-ordinated conduct is the number of sellers of capacity rights. Where they are numerous, co-ordinated conduct may not be an issue at all. The same is true where the joint venture faces effective competition from other infrastructure, which customers regard as interchangeable with the facility owned by the co-operation. In situations where conditions for secondary rights’ trading are optimal, the co-ordination of the parties’ market conduct may also be too difficult and therefore improbable. However, where it is foreseeable that only the infrastructure owners will compete against one another for the sale of capacity rights, at least at the primary level, the smaller the number of companies involved, the greater the risk of the co-ordination of market conduct. The Commission does not indicate in its Guidelines when tacit collusion becomes likely within an oligopoly. A critical stage is arguably reached where the oligopoly comprises less than five suppliers.852

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Where the facility corresponds to the relevant market, the parties are the only suppliers on the primary level of the market. The fact that the capacity may be resold on a secondary market does not impose an effective competitive constraint on the primary market since the price on the primary market, which is determined by the parties, is the input cost on the secondary market. If it is likely under these circumstances that the parties align their market behaviour, they are also at the same time colluding to gain, maintain or increase market power. The two-step-analysis mentioned above requiring an examination of, first, the likelihood of the co-ordination of market conduct and, subsequently, whether the parties gain, maintain or increase market power, is then accomplished in one single step.

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However, the competition concerns will often be outweighed by efficiency gains when the cooperation leads to new infrastructure or additional infrastructure capacity as opposed to merely combining existing infrastructure. While the latter will probably only give rise to cost efficiencies, the former will normally create value through the construction of new infrastructure. Investment in infrastructure is likely to entail positive effects on competition through increased capacity. If absent the restriction the project would not go ahead or only on a smaller scale, the agreement triggering the investment will usually generate posi-

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852 In the merger case Gencor/Lonrho the Court stated that collusion is likely to occur with 2-4 suppliers in a market Case T-102/96, ECR 1999, p. II-879 paragraph 134.

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tive effects on competition.853 Benefits are particularly great if the new or additional capacity would benefit new entrants and allow them to enhance supplies on downstream energy markets.

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This raises the question whether beneficial effects on a related energy markets may be weighed against anti-competitive effects on the market of the facility itself. In general, efficiencies are analysed relevant market by relevant market. However, balancing anti-competitive and pro-competitive effects across market boundaries is permitted when the markets are related and the group of customers affected by the restriction and benefiting from the efficiency gains is substantially the same.854 It is submitted that infrastructure joint ventures normally fulfil both conditions. The energy consumers on the downstream markets, which likely suffer from the anti-competitive effects, will in most instances also profit from the efficiency gains. The UK–Belgium Interconnector project is an example of such a case. As the Commission stated in its published case report, the new pipeline between the UK and the Continental Europe created new opportunities for competition between gas markets which so far had been quite isolated.855

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Infrastructure is but a means for supplying energy. A competition analysis must therefore also assess whether an infrastructure joint venture produces any anticompetitive spill-over effects on related markets. What applies to beneficial effects applies thus also to restrictive effects. Anti-competitive effects are possible when vertically integrated suppliers participating in the infrastructure joint venture hold strong positions on an electricity or gas market related to the infrastructure. The co-operation at the infrastructure level may, for example, tip the balance in an already concentrated market and render tacit collusion on the supply market more likely (network effect).856 In reality, infrastructure agreements will probably only exceptionally carry enough commercial weight for parties to cause co-ordinated market conduct on a spill-over market. Where such anti-competitive spill-over effects are likely to occur, it might, however, require very substantial efficiencies to outweigh the restriction of competition. In particular, in a case where a co-operation agreement only combines existing infrastructure, a prohibition under Article 101 cannot be excluded. 853 See in this respect Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity, paragraph 32. The document is available at http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/sec_2009-642.pdf. 854 See Guidelines on the application of Article 101(3), paragraph 43, and Case C-382/12 P, Mastercard, ECR 2012, page I-0000, paragraphs 242 and 243. 855 See Commission, Competition Report 1995, p. 126. 856 See above, book paragraph 3.52.

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In conclusion, it can be said that infrastructure cooperations offering new capacity to all interested third parties are, in most cases, likely to be compatible with EU competition law. In contrast, cooperations which only combine already existing infrastructure may be found incompatible with the competition rules.

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7.3.2 Special competition issues of cooperations granting third party access It has already been mentioned that the framework for the trading of capacity rights may be important for the competition analysis of an infrastructure cooperation. The framework is, however, not the only consideration relevant to an assessment of the probability of co-ordinated market conduct or tacit collusion. The framework set by the parties may also on its own infringe Article 101. Generally speaking, the introduction of a third party access regime for the use of infrastructure is fully in line with the objective of free and open markets. A third party access regime will therefore only exceptionally be in conflict with the competition rules. Three issues may arise.

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Article 101 aims at protecting competition by prohibiting agreements which allow the parties to jointly exercise market power or which foreclose markets. In gas and electricity markets that historically have been characterised by dominant incumbents, foreclosure is a particular concern. Agreements between owners of an infrastructure and a dominant energy supplier that provide for long-term reservation of the transport capacity are therefore likely to attract scrutiny.857

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Technical limitations for the use of a piece of infrastructure by third parties fully justify any constraints for the trading of capacity rights. The Commission explicitly recognized this principle in its review of the arrangements concluded for UK – Belgium Interconnector. It paid particular attention in this respect to the provisions regarding any future increase of the interconnector capacity. The Commission emphasised in its report that the joint venture arrangements have to operate in such a way that technically viable flow enhancements to meet increasing demand are in place. Another issue is who would have to fund capacity increases? The Commission accepted in this case that those users who wish to increase flow capacity have to pay.

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857 See in this respect, Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity, paragraph 33. The document is available at http://ec.europa.eu/energy/sites/ener/files/documents/sec_2009-642.pdf.

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A similar principle as for technical limitations seems to apply to the constraints that parties to a joint venture agree upon for the trading of their capacity rights for the facility. In its second review concerning the UK – Belgium Interconnector the Commission verified whether the standard transportation agreement, which restricts shippers in their right to transfer capacity to third parties, was not unduly rigid and artificially restrained trading in the secondary rights market. Of concern were the long duration of assignment and sublease contracts and the high minimal amounts due to be delivered through such contracts. The Commission also paid attention to the transparency of the interconnector operations, e.g. the advance announcement of flow reversals in order to guarantee a sufficient level playing field. The Commission did not raise any objections in this respect apparently because the collaborators envisaged to lift the constraints and to enhance the transparency of the operations.858

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Constraints on third parties to trade the capacity rights of an infrastructure joint venture, which are fully justified on technical or commercial grounds, do not fall within the scope of Article 101(1). As a result, there was no need to have recourse to Article 101(3).

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This scenario implies that participants in the infrastructure joint venture are not only infrastructure operators but at the same time also energy suppliers, i.e. vertically integrated energy firms. In this scenario a restriction of competition may arise on a market that is upstream, downstream or otherwise related to the infrastructure in question. Since the infrastructure is reserved for own use, there is no market for the exploitation of the facility on which competition could be distorted. The major competition concern under these circumstances is therefore that the rivals of the parties are foreclosed from accessing related energy market because of the agreement.859

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If the parties decide individually not to sell capacity to third parties Article 102 may be applicable provided that the parties are collectively dominant.860 It is a condition that the infrastructure, e.g. a cross-border pipeline or interconnector, is of key importance for accessing a related energy market. This could, 858 See Commission, press release IP/02/401 of 13.03.2002; Competition Report 2002, p. 206. 859 Lack of sufficient access to infrastructure has been identified as a major barrier to entry in the Energy Sector Inquiry; see Commission Communication COM (2006) 851 Final. The full report is a technical annex to the Communication taking the form of a DG Competition report on the energy sector inquiry (SEC (2006). 860 See in this respect Commission Decision of 4.5.2010, Case COMP/39.317 – E.ON gas foreclosure.

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for instance, be the case if the infrastructure(s) operated by the co-operation constitute(s) the bottleneck through which all or most of the electricity or gas sold in an area has to be transported. The reasons for the scarcity of transmission capacity can be manifold. One possible reason could be that long-term reservation agreements do not permit transportation through alternative transmission lines. Another reason could be that only the new capacity constructed will give access to new supply sources, which are crucial for meeting growing demand or replacing depleted sources. In the case of agreements that restrict the parties’ sale of the capacity, the agreement is likely to have as its object to restrict competition unless the parties are able to argue convincingly that absent the restriction the project would not have been implemented. This is more likely to be the case when the parties comprise producers and buyers of gas or electricity than where all parties are producers or traders. The former was the case in the Viking Cable case.861 Statkraft and E.ON concluded an agreement whereby the former would supply electricity to the latter. Moreover, in order to implement the agreement they also agree to build a new interconnector between Norway and Germany. It is likely that the interconnector would not have been built if it could not be reserved for the intended purpose, namely the supply of electricity generated by Statkraft to E.ON. The Commission noted that excess capacity could be traded. Hence, the restriction did not go beyond what was necessary. Moreover, the Commission considered that competitors of the collaborators disposed of sufficient alternatives to access in this case both the relevant upstream and downstream supply markets. They did not depend on the new sub-sea cable which the parties to the agreement intended to build.

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However, when infrastructure is a scarce resource, it is likely that the parties will be obliged to give third parties access to a certain share of the jointly held capacity. In this respect the Commission practice in the field of third party access exemptions is instructive.862 In its interpretative note the Commission services provide that the new infrastructure should have the effect of diluting the market power of the dominant undertaking(s). The share of capacity held by one or more dominant companies in the new infrastructure has to be significantly lower than its/their market share(s).863 In an recent individual exemption deci-

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861 See Commission Notice pursuant to Article 19(3) of Reg. 17 concerning Viking Cable, OJ C 247/11, 5.09.2001. 862 Exemption decisions are published by DG Energy: https://ec.europa.eu/energy/sites/ener/files/documents/exemption_decisions2018.pdf. 863 See Commission staff working document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for

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sion, the Commission required that any undertaking with a market share in any relevant market exceeding 40% must not reserve more that 40% of relevant exit point capacity.864

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The efficiency defence of Article 101(3) may be invoked in the case of a restriction of competition through the foreclosure of rivals. The Commission’s practice regarding third party access exemptions is also instructive in this regard. In practice, exemption is the rule, not the exception. Agreements concerning the construction of new or additional capacity are much more likely to fulfil the conditions of Article 101(3), even if built for captive use, than the withdrawal of existing infrastructure capacity from the market.

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Since for all new or enlarged infrastructure projects the foreclosure of rivals may be completely or at least partially avoided through the public offering of capacity to interested third parties the conditions of indispensability is likely to be of particular importance.865 The parties will have to substantiate why the project would be not executed (to the same extent) if the capacity could not be reserved for the parties. Exclusivity is normally only justified for the time required by the parties to ensure an adequate return on their investment in the infrastructure.866 Since the parties are suppliers it is likely that the project would not go ahead if they could not reserve a significant share for themselves. However, it may well be that partial access would not adversely affect the project and the parties’ incentives. This means that in practice a balance may need to be struck on the basis of the indispensability condition.

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In conclusion, parties to an agreement intending to exclusively use infrastructure for their own requirements may infringe the EU competition rules when foreclosing rivals on a related energy market. This also possibly applies where the co-operation serves the purpose of constructing a new piece of infrastructure. The reason for this is that foreclosure can usually be avoided through opening the co-operation to rivals (by offering an “open season”) or, at least, through offering capacity rights to competitors. Alternatively, efficiencies may not suffice to justify the parties’ exclusive use of all capacity for its whole lifetime.

access to the network for cross-border exchanges in electricity, paragraph 34. The document is available at http://ec.europa.eu/energy/sites/ener/files/documents/sec_2009-642.pdf. 864 See e.g. Commission Decision of 25.7.2018 on the exemption of the Interconnector Greece-Bulgaria from the requirements regarding third party access, tariff regulation and ownership unbundling, para. 72. 865 I.e. prior to building the infrastructure, others are invited to invest in it, enabling them to acquire capacity. 866 See Guidelines on the application of Article 101(3), paragraph 81.

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CHAPTER 3 Vertical agreements 1.

Introduction

Vertical agreements are characterised by the fact that two or more firms, each operating at a different level of the production or distribution chain, enter into an agreement or concerted practice. These so-called “vertical restraints” may for instance be part of a supply contract with a commercial or industrial energy end-user or a distribution agreement with an energy reseller. For a restraint to be qualified as vertical it must it relate to functions which for the purposes of the agreement both firms exercise at different levels of the supply chain.867 Vertical agreements entered into by energy suppliers and buyers may be prohibited by Article 101 when they restrict competition and do not confer sufficient benefits to outweigh their anti-competitive effects (efficiency defence).868 Unlike hardcore horizontal agreements such as cartels, vertical agreements generally produce efficiencies to a greater or lesser extent. Thus, although there is a presumption that the conditions of Article 101(3) are not satisfied in the case of vertical hard-core restrictions, there is greater scope for arguing that they are pro-competitive because they are necessary to produce efficiencies.869 In vertical relationships, the product of one firm is the input for the other. The exercise of market power by either the supplier or the buyer would normally hurt demand for the product of the other party. The firms involved in vertical relationships therefore usually have an incentive to prevent the exercise of market power by the other party. This “self-restraining” character is one of the rea867 See Commission Vertical restraints guidelines, paragraph 24, Appendix 4. 868 See Article 2(1) Vertical block exemption Regulation and the Vertical restraints guidelines, paragraphs 5, 23 et seq, Appendix 4. 869 See Commission Vertical restraints guidelines, paragraph 47, Appendix 4.

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sons why competition policy does not regard arrangements between a supplier and a buyer to be as damaging as horizontal agreements between competitors.870 However, this self-restraining character should not be over-estimated.871 When undertakings have market power they can use vertical restraints to exclude competition by raising the costs of their rivals and thereby increase their own profits. Moreover, when the parties face inelastic demand for their products and services, they may be able to pass on to consumers the price increases resulting from the exercise of market power and may therefore not seek to restrain it. This may be an issue in energy markets where the elasticity of demand is often low. The main competition concerns arising from vertical agreements are foreclosure of third party competitors (inter-brand competition) on the one hand and market partitioning and resale price maintenance (intra-brand competition) on the other hand. Unlike horizontal agreements, vertical agreements do not allow the parties to create market power where previously there was none. A vertical arrangement will not appreciably restrict competition, unless either the supplier or the buyer already possesses market power prior to entering into the arrangement. It is thus only when inter-brand competition at the horizontal level of the supplier or buyer is not effective that it becomes important to protect residual competition against the possible negative effects of vertical restraints.872 For example, in such circumstances it may no longer be compatible with the competition rules for a supplier to enter into non-compete obligations whereby buyers undertake to purchase all their energy requirements only from the supplier. Moreover, when inter-brand competition is weak (and there are only one or a few suppliers), it becomes important to protect intra-brand competition.873 For instance, where an electricity or gas supplier or any of its distributors has the power to raise prices above competitive levels, the supplier may not be able to grant its distributors exclusivity.874 Competition policy acknowledges that vertical arrangements serve useful economic purposes in the vast majority of cases. They may for instance be necessary for the parties to recoup an investment that either of them intends to make. Where, for example, the supplier invests in equipment, training of staff or pro870 See Vertical restraints guidelines, paragraph 98, Appendix 4. See also L. Peeperkorn, The Economics of Verticals, Competition Policy Newsletter 1998 (2). 871 Vertical restraints guidelines, paragraph 99, Appendix 4. 872 See in this respect Commission Communication COM (2006) 851 Final. The full report is a technical annex to the Communication taking the form of a DG Competition report on the energy sector inquiry (SEC (2006). 873 See Vertical restraints guidelines paragraph 6, Appendix 4. 874 This does not mean that the supplier is obliged to supply others but merely that he is prevented from contractually agreeing not to do so. Obligations to supply may only be imposed under Article 102 TFEU.

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motion on the reseller’s premises and such investment may also attract customers for its competitors, a vertical restraint such as a non-compete obligation may help to overcome the so-called “ free-rider problem” 875 that the investor could otherwise face. Similarly, where one party needs to invest in its production or distribution facilities before a supply or distribution contract can be implemented, the investor may wish to agree a vertical restraint lowering its investment risk. In this case, a vertical restraint in the form of a non-compete clause when the supplier is the investor, or an exclusive distribution right when the investment is made by the buyer, may solve the so-called “ hold-up problem”.876 Holdup arises when an investment, once it is made, creates a dependency which the other party exploits e.g. by asking higher prices. Such benefits may arise irrespective of whether the parties have a certain degree of market power. However, at low levels of market power it can normally be presumed that the pro-competitive effects outweigh the anti-competitive effects. This view is reflected in the Vertical block exemption Regulation, which has established a comprehensive safe harbour in favour of vertical agreements.877 Subject to a list of hard-core restrictions,878 the Vertical block exemption Regulation presumes all vertical restraints to be legal as long as a market share threshold of 30% is not exceeded. The market share threshold applies to the market(s) on which the supplier sells the products and the market(s) on which the buyer purchases the products covered by the agreement.879 Above the market share threshold the agreement is subject to self-assessment. There is no presumption of illegality above the market share threshold.880 The agreement will be caught by Article 101(1) only where it is likely to have negative effects on competition and these effects are unlikely to be outweighed by efficiencies. Below the market share threshold competition authorities may decide to intervene by withdrawing the benefit of the block exemption and prohibit the agreement. To do so, they must prove that the agreement is caught by Article 101(3) and that it does not satisfy the conditions of Article 101(3). Withdrawal of the benefit for the block exemption is normally unlikely to occur since below the market share threshold the parties are unlikely have sufficient market power to harm competition and 875 See Vertical restraints guidelines, paragraph 107(a), Appendix 4. 876 See Vertical restraints guidelines, paragraph 107(d), Appendix 4. 877 See Commission Regulation 330/2010 on the application of Article 101(3) to categories of vertical agreements and concerted practices, OJ L102/1 of 23.4.2010. 878 See Article 4. 879 See Article 3(1). Under the previous Vertical block exemption Regulation (Commission Regulation 2790/99) it was normally only the supplier s market share that was relevant. 880 Recital 9 to Vertical block exemption Regulation

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consumers. However, the contrary may be true in electricity markets where market share may be an imperfect proxy for market power.881 Moreover, withdrawal may be required when networks of vertical agreements entered into by several significant suppliers cumulatively foreclose the market (“cumulative effect”).

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Vertical agreements are common in the energy industry. The most important restraints in vertical agreements that have been examined by competition authorities will be discussed here, namely non-compete obligations and territorial restrictions including exclusive distribution agreements.

2.

Exclusive energy purchasing and supply arrangements

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Energy products are generally supplied either to large industrial clients or to intermediaries who in turn re-sell the energy to smaller professional or household consumers. Competition concerns may arise when these supplies are carried out on the basis of long-term exclusive purchasing and supply relationships. There exists a great variety of forms and means to establish exclusive dealing between a supplier and a buyer. The “classical types” of exclusivity arrangements are noncompete obligations and exclusive distribution agreements. A non-compete obligation requires the buyer to purchase all or practically all its requirements from a particular supplier.882 By contrast, an exclusive distribution agreement obliges the supplier to sell its product only to the buyer and not to any other reseller for distribution in a specific sales area or to a particular class of customers.883 These two classical exclusivity arrangements are often combined in distribution agreements with resellers.

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Exclusive relationships may occur at various levels of the electricity and gas supply chain as illustrated in the chart below. Exclusivity arrangements used to be customary in industry. However, more recently, competition authorities have increasingly intervened against exclusivity arrangements as part of their efforts to open up electricity and gas markets to competition. Moreover, as markets become more liquid and competitive non-exclusive arrangements become feasible and more attractive. 881 See book paragraph 3.71 above. 882 Article 1(d) Vertical block exemption Regulation. See also Vertical restraints guidelines, paragraphs 66 and 129. A non-compete obligation is different from exclusive supply. In antitrust terminology the latter is limited to the brand of the supplier, who is obliged to sell exclusively or predominantly to a single buyerwhereas the former includes the brand of the supplier and all competing goods or services, see Vertical restraints guidelines, paragraphs 129 and 192. 883 See Vertical restraints guidelines, paragraphs 50, 109, 161, 178.

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Typical vertical restraints in the electricity and gas industry. Exclusive dealing arrangements do not necessarily raise competition concerns. When a supplier and a reseller commit to deal only with each other, the arrangement may in fact promote competition. This is likely to be the case when it facilitates new market entry and stimulates investment. However, exclusive dealing arrangements may raise competition concerns when inter-brand competition – at the suppliers’ or buyers’ level – is reduced due to the existence of one or more firms with a significant degree of market power. Once inter-brand com225

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petition at the production or distribution level is not effective, exclusive dealing may have adverse effects because it may foreclosure rivals from access to energy markets or facilitate collusion among suppliers or re-sellers on their respective energy markets. In such circumstances, exclusive dealing may constitute a restriction of competition within the meaning of Article 101(1).

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To be caught by Article 101(1) a vertical restraint does not have to be the only or principal barrier to competition. It is sufficient that the restraint has appreciable effects on competition. Thus, when exclusive dealing agreements contribute to market foreclosure and do not generate countervailing efficiencies, these arrangements are not compatible with competition law, irrespective of the existence of other impediments to competition prevailing in an energy market. Non-compete obligations are generally more harmful to competition than exclusive distribution agreements as they may prevent competing products from reaching the market. By contrast, exclusive distribution agreements may restrict intra-brand competition but cannot prevent competing goods from reaching final consumers.884

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Non-compete obligations oblige the buyer to procure all or practically all its requirements on a particular market from a given supplier and oblige it not to engage in manufacturing, purchasing, selling and re-selling of competing goods or services.885 It is not required that the agreement provides for de jure exclusivity. It suffices for competition law purposes that due to obligations or incentives contained in the agreement the buyer de facto covers all or practically all its requirements from the same supplier.886

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De facto exclusivity may result from incentive schemes such as a rebate that is conditional on the buyer sourcing all or practically all its energy needs from the supplier.887

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De facto exclusivity may also follow from fact that it may not be technically possible or economically viable to have a second simultaneous supplier for the same site. In the Distrigas case the Commission took the view that only very large customers, with an annual off take exceeding 500 GWh of gas could in practice be 884 See Vertical restraints guidelines paragraph 151. 885 See Article 1(d) Vertical block exemption Regulation; Vertical restraints guidelines, paragraphs 66 and 129, Appendix 4. 886 See Vertical restraints guidelines, paragraphs 66 and 129, Appendix 4. 887 See Case 85/76, Hoffmann-La Roche, [1979] ECR p. 461.

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supplied by more than one supplier and there were very few such customers.888 As a result, contracts with other customers that contained minimum purchasing obligations were considered de facto exclusive. By contrast, in the Long-term contracts France case the Commission took the view that industrial electricity users were in principle able to have more than one supplier.889 Thus, the commitments accepted by the Commission contain an obligation on EDF to offer non-exclusive contracts that effectively allowed the customer to have a second supplier.890 Foreclosure concerns not only arise when the buyer is obliged de jure or de facto to obtain 100% of its energy requirements from the supplier. Negative effects on competition may also arise when a buyer is required to procure a substantial share of its requirements from one supplier.891 The Vertical block exemption Regulation treats direct and indirect obligations of a buyer to purchase more than 80% of its total requirements of the contract goods or services in question from the same supplier as a non-compete obligation.892 Obligations or incentives that make the buyer purchase less than 80% of its requirements from one supplier are defined as quantity forcing. Quantity forcing may be expressed as a minimum annual quantity (MAQ) set below 80% of the customer’s normal requirements over time. In cases where a minimum purchasing obligation does not lead to de facto exclusivity, only the share of demand that is effectively tied to a given supplier is taken into account. Thus, if a buyer is required to buy 50% of its needs from a given supplier, only that volume is taken into account when assessing the impact of the agreement on competition. To support a finding of exclusivity, it is not sufficient that the buyer as a matter of fact buys all its requirements from the same supplier. The agreement must contain obligations or incentives that prevent the buyer from switching supplier. In the absence of an obligation or an incentive scheme the buyer may at any time switch to another supplier and the mere fact that it has chosen not to do so is not sufficient to support a finding that the buyer is subject to a non-compete obligation.

888 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 20. 889 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 83. 890 This commitments allows the customer to source from a second supplier, including arbitragers like KalibraXE, see in this respect the interim measures decision of the French competition authority of 25.4.2007 in case 07-MC-01, KalibraXE. 891 See Vertical restraints guidelines paragraphs 66 and 129; Appendix 4. See below the Gas Natural/Endesa case, at book paragraph 3.258. 892 See Article 1(d) Vertical block exemption Regulation.

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2.1.1 Competition issues of non-compete obligations in energy supply and distribution contracts 3.208

The principal competition concern relating to non-compete obligations is foreclosure of competition. By obliging energy buyers to purchase only from it, a supplier excludes rivals from selling to those customers. Rivals will at least temporarily not be able to successfully win their business even if they offer a lower price. Foreclosure effects may arise from contracts entered into by a single dominant supplier or from parallel networks of contracts entered into by several large suppliers. In the latter case foreclosure stems from the cumulative effect of these parallel networks of agreements. The following three conditions must generally be satisfied for non-compete and quantity forcing obligations to be caught by Article 101(1): (1)

One or more suppliers entering into non-compete obligations must individually or collectively have market power;

(2)

The agreements must cover a substantial part of the market;

(3)

The agreements must be of long duration.893

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As regards the first condition the Commission points out in its Vertical Restraints Guidelines that non-compete obligations are “unlikely” to create a single or cumulative foreclosure effect on competition as long as the market share of the largest supplier is less than 30% and the aggregate share of the five largest players remains below 50%.894

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Secondly, a substantial part of total market demand must be tied to the incumbent suppliers (“market coverage”).895 The assessment is based on a sliding scale. In markets dominated by a single undertaking the intervention threshold is lower than in cases where several firms operate on the market. In dominated markets competition is already substantially weakened and distorted in favour of the dominant firm. A larger part of the market therefore needs to be contestable in order to give other players the opportunity to enter the market and expand. Even so, for competition concerns to arise such obligations must cover a significant share of demand.896 893 See in this respect Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 30. 894 See Vertical restraints guidelines, paragraph 35, Appendix 4. 895 As to the relevance of market coverage, see Case C-413/14 P, Intel, ECLI:EU:C:2017:632, para. 139. 896 See in this respect Case C-413/14 P, Intel, ECLI:EU:C:2017:632, para. 139 and Commission Decision of

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Where more than one supplier impose non-compete obligations, each has to tie a significant part of total demand and the parallel networks of non-compete agreements must cause a significant “cumulative foreclosure effect”.897 As long as most buyers are still free to switch to other energy suppliers, rivals can grow and are not foreclosed from a market. The Commission states in its de minimis Notice that a cumulative effect is unlikely to occur as long as less than 30% of demand is tied.898 This threshold is intended to apply to all products, including final consumer goods. In cases involving such products non-compete obligations may be an issue at relatively low levels of market coverage, because access to wide-spread distribution is often a precondition for successful entry.899 In the case of intermediate products such as gas and electricity (when supplied for industrial use) significant foreclosure due to cumulative effects is likely to require a significantly higher tied market share. In the Vertical Restraints Guidelines the Commission takes the view that for intermediate products a serious cumulative effects is unlikely to arise as long as less than 50% of the market is tied.900 In cases where a single firm has a significant degree of market power the intervention threshold is lower. For instance, in the Repsol case the undertaking concerned had tied around 25-35% of demand.901 In cases involving dominant firms the threshold for insignificant foreclosure is likely to be below 20-25%.902

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In the de minimis Notice the Commission considers that suppliers with a tied market share of less than 5% do not in general significantly contribute to foreclosure due to the cumulative effect of non-compete obligations.903 It follows that an individual supplier does not have to possess market power for its exclusive supply arrangements to be caught by Article 101(1) where the cumulative effect of numerous exclusive arrangements is being considered. In cumulative effects cases the application of Article 101(1) only presupposes a significant contribution by each supplier to the overall foreclosure effect.904 In dominated markets the threshold for significant contribution to a foreclose effect is likely to be higher than 5% to the extent that it is relevant at all. In such markets the dominant firm is the main source of distortion of competition. Even if small competitors conclude non-compete agreements they are not the source of the

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17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 33. See Vertical restraints guidelines, paragraphs 76 and 134, Appendix 4. See Commission de minimis Notice paragraph 10. See in this respect Case T-9/93, Schöller, ECR 1995, p. II-1611. Vertical restraints guidelines paragraphs 38, Appendix 4. See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol, paragraph 24. See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 35, and Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraphs 72 to 74. 903 See Vertical restraints guidelines, paragraph 134, Appendix 4. De minimis Notice paragraph 8. 904 See Case T-9/93, Schöller, ECR 1995, p. II-1611, paragraphs 76 seq. 897 898 899 900 901 902

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foreclosure problem. If the contracts entered into by the dominant firm are dealt with, it is likely that the foreclosure problem is effectively addressed. Moreover, non-compete obligations may be necessary for small market players to establish a foothold on the market. In dominated markets it may therefore be detrimental to competition to apply the same standard to all players. Thirdly, the exclusive relationship must in general be of significant duration to cause an appreciable foreclosure effect. This is particular true in cases that do not involve dominant firms. Short-term exclusivity obligations are normally unlikely to exclude as-efficient rivals.905 Ex ante competition between suppliers to obtain short-term exclusive contracts from energy buyers is likely to make up for any ex post foreclosure of rivals for the short duration of the supply relationship. As long as no single firm is dominant rivals ought to be in a position to compete effectively for the contracts when they come up for grabs. In fact, ex ante bidding for contracts may intensify competition between suppliers. This is not least the case in markets for homogeneous products.

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However, it is important to keep in mind that ex ante bidding does not create new competition that did not previously exist. It is therefore not a general defence in favour of non-compete obligations that the agreement was entered into following an open tender procedure. This is particularly true when dominant firms participate in the tender, since other players may not be able to bid effectively against the dominant firm. For instance, it may be that the dominant firm is an unavoidable contracting party because competitors are unable to supply the range of energy products that they demand. In that case, competitors may be unable to bid for the buyers’ entire needs. Long-term contracts that result from a tendering process may therefore raise competition concerns despite the facially competitive nature of the process.

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For the Commission, short-term means in general and across all industries one year.906 The one-year period does not have to be a calendar year. It can also be a gas year running from 1 October till 30 September. Non-compete obligations 905 The assessment may differ in cases involving dominant firms. In case COMP/39.386 – Long-term contracts France, the dominant firm concerned offered commitments whereby it would offer non-exclusive contracts effectively allowing the customer to contract for additional supplies with another supplier, see Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 83. If the dominant firm is an unavoidable supplier for a share of customers’ demand, exclusivity is sufficient to restrict competition even if it is a short duration because it turns competition into an ‘all or nothing’ game which distorts competition in favour of the dominant firm. 906 The Commission assumes that non-compete obligations shorter than one year entered into by non-dominant suppliers does not give rise to appreciable anti-competitive or net negative effects, see Vertical restraints guidelines, paragraph 133, Appendix 4.

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lasting longer than one year risk being caught by Article 101(1) if the other two conditions for foreclosure are met.907 However, each case has to be assessed on its merits. At the end of the day what matters is whether a sufficiently large part of the market is contestable on a recurrent basis so as to conclude that the market is not significantly foreclosed. The Commission’s approach to long-term non-compete obligations has been developed in two cases, namely the Distrigas and the Long-term contracts France cases.908 In Distrigas, a dominant incumbent, committed to ensure that for each calendar year a minimum of 65% and on average for all calendar years a minimum of 70% of the gas volumes supplied to industrial users and electricity producers in the market concerned would return to the market, i.e. alternative suppliers can make a competing offer to the customers concerned and that the duration of all contracts covered by the commitments would not exceed 5 years.909 In the Long-term-contracts France case the corresponding percentages were 60% and 65%. In this case the Commission also accepted that if the customer at certain intervals was entitled to opt out of the agreement at no cost or penalty, the effective duration of the agreement was the interval between the opt-outs. The Commission thereby deviated from the approach in Article 5(1) of the Vertical block exemption Regulation whereby a contract that is tacitly renewed unless terminated by the buyer is deemed to be of indefinite duration. It is submitted that in the case of agreements involving industrial buyers this approach is correct. Such entities are large professional buyers and are likely to keep track of the points in time when the opt-out may be exercised. The stricter approach of the Vertical block exemption Regulation is therefore not required to ensure that customers are contestable at regular intervals. 907 It has sometimes been argued that for the assessment of the possible foreclosure effects of an electricity or gas supply contract, only the period of time elapsed since liberalisation became effective should be taken into account. However, EC competition law has always applied to the electricity and gas sectors, at least in the Member States without statutory monopoly suppliers, and not only since the Community-wide market opening in 1999 and 2000 respectively. Non-compete obligations could thus contravene Article 101 before liberalisation unless they also generated countervailing benefits. Previously existing legal monopoly rights of the supplier may have had the result that potential contraventions of Article 101 had no practical effect. However, they cannot justify the violation of Article 11(1), and in particular, they cannot prolong the period of the time for which the exception of Article 101(3) applies. See D. Schnichels, Marktabschottung durch langfristige Gaslieferverträge, EuZW 2003 p.173. 908 See Commission Decision of 11.10.2007 in Case COMP/37.966 – Distrigas and see Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. 909 More specifically, no new contract with industrial users and electricity producers can be longer than five years. Existing contracts with a duration of five years or more are to be granted unilateral termination rights with prior notice and without indemnity, which allows Distrigas as a transitional measure to treat them as one year contracts.

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The approach developed by the Commission in the Distrigas and Long-term contracts France cases allows for a certain amount of flexibility and thus avoids imposing an overly rigid regime. Under the commitments, 30 to 35% of the incumbents’ sales could be tied more than one year ahead subject to the 5-year cap. A number of contracts with a duration of up to 5 years can thus be included in the portfolio. At the material time, the 30 to 35% limit was equivalent to 20 to 25% of the relevant market.910 It would thus seem that in cases involving dominant suppliers the Commission does not consider a tied market share of this magnitude to have significant foreclosure effects outweighing the benefits of the long-term contract.911

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The Commission’s approach is arguably particularly well-suited for cases where the competition concerns are caused by non-compete agreements concluded by a single firm. In cumulative effects cases it may be more practical to impose a duration cap and not work with the more complex instrument of a tied market share. This may explain the approach of the German competition authority in a case involving a number of German gas companies. In a decision confirmed by the German supreme court,912 the Bundeskartellamt913 considered that networks of non-compete agreements between incumbent suppliers and resellers (Stadtwerke) foreclosed the market.914 The companies concerned were required to reduce the duration of their contracts to two years. This period could be extended to four years if another supplier effectively supplied at least 20% of the customer’s requirements.

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The foreclosure of rivals is not the only competition concern that may arise from non-compete obligations imposed by energy supplies. The practice may also act as a facilitating device to strengthen collusion among suppliers. Where most buyers on a given market are obliged to exclusively source all of their requirements for a particular good or service from oligopolistic suppliers over a long period of time, this may have the result of stabilising suppliers’ market shares and softening competition.915

910 The Commission used tied share of sales as a proxy for the tied market share since it acknowledged that it was difficult to measure with sufficient accuracy the size of the market. This would be a problem in the context of commitments decisions since undertakings offering commitments are subject to heavy fines if they violate the commitments. 911 These cases are not reflected in the Vertical restraints guidelines, paragraph 140, Appendix 4. Like the previous guidelines, the current guidelines provide that for a dominant company, even a modest tied market share may already lead to significant anti-competitive effects. 912 See judgment of 10.2.2009 in case KVR 67/07 – E.ON. 913 See Decision of 13.01.2006 – Langfristige Lieferverträge (Case B8-113/03) and Discussion Paper, 2005, p. 6, available at http://www.bundeskartellamt.de. 914 Contracts of shorter duration were not considered feasible due to the characteristics of the buyers. 915 See Vertical restraints guidelines, paragraphs 100 and 130, Appendix 4.

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Finally, it is relevant to mention consortia of energy intensive industrial users. In several Member States such consortia have been formed. While some have been created with a view to constructing and running new power plants, others have concluded long-term exclusive supply agreements with suppliers. Such agreements are subject to the normal competition analysis of long-term non-compete agreements and are thus assessed in the overall context in which they occur. This means that they form part of the bundle of contracts that may exist in the market and which may lead competition authorities and courts to conclude that the market is being foreclosed. Hence, in the assessment of likely foreclosure effects the volumes supplied to consortia of buyers are taken into account when assessing the tied market share and contract duration.

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To summarize, foreclosure of new competition and the maintenance or strengthening of preexisting market power is the major competition concern in relation to non-compete obligations. Whether or not Article 101(1) applies depends on a full competition analysis unless the general safe harbour for vertical restraints is applicable to the agreement in question. In other words, non-compete obligations are not hard-core restrictions. They are assessed under the effects standard. This means that they are likely to raise competition concerns when they are concluded by dominant incumbents that have also concluded other similar supply contracts, whereas they are unlikely to give rise to competition concerns when they are concluded with new entrants. In oligopolistic markets non-compete agreements concluded by the main players may give rise to so-called cumulative foreclosure effects.

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2.1.2 Safe harbour: the Vertical block exemption Regulation A legal safe harbour for all vertical non-hard-core restraints facilitates the assessment of non-compete clauses under the EU competition rules. Instead of examining in detail whether an arrangement constitutes a restriction of competition and possibly generates countervailing benefits, it suffices to analyse whether the three conditions of the safe harbour are present. The Vertical block exemption Regulation presumes the legality of non-compete obligations if they are concluded between a supplier and a buyer each with a market share not exceeding the market share threshold of 30%. The relevant market for determining whether the 30% threshold is reached is the geographic and product market on which the supplier directly sells the contract goods or services to its customers and the buyer purchases these contract goods or services. Applied to the energy industry the relevant market can be the electricity wholesale market, where power generators and importers sell to distributors as well as to large industrial consumers, 233

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the gas wholesale market where producers and importers sell to distributors, industrial end-users and power generators or the wholesale markets for petroleum products where crude oil refiners and importers sell to industrial end-users and retailers. In energy sectors with an intermediate distribution level there may be an additional relevant market where regional distributors sell to local distributors and small industrial or commercial consumers.

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As for the safe harbour for horizontal restraints, the market shares are calculated on the basis of value figures relating to the preceding calendar year.916 All sales by companies belonging to the same group as the supplier and the buyer have to be included in the calculation (connected undertakings).917 Where the supplier engages in “ dual distribution” 918 and is not only active at the wholesale but also at the distribution or retail level, all internal sales to integrated intermediaries must be taken into account when calculating its market share on the wholesale market which is the relevant market for the purposes of the safe harbour919. Foreclosure effects caused by sales to final energy consumers would otherwise not be taken into account. Establishing the market share may be difficult in cases where the energy supplier does not know the sales figures of its competitors on the wholesale market. To reduce uncertainty as to whether or not the supplier actually benefits from the safe harbour it can be useful to look at the usually more transparent retail market. The share of the supplier on the downstream energy market usually provides a good indication as to whether the limit of the safe harbour on the relevant wholesale market is exceeded or not.920

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The safe harbour covers non-compete obligations relating to a particular relevant market. It does not automatically give comfort for non-compete obligations imposed on buyers for the purchase of products belonging to other markets in spite of being distributed by the same distribution channel. The safe harbour conditions have to be met for each product forming a relevant market of its own. This is of practical relevance in particular for petrol companies distributing not only fuel but also food and non-food products through service stations. 916 See Article 8(1), Vertical block exemption Regulation. 917 See Article 8(1) Vertical block exemption Regulation. 918 Dual distribution is a frequent feature for instance for refiners of crude oil which sells their products not only at wholesale level but also through vertically integrated retail outlets. An example for the latter is the sale of motor-fuel to dealers as well as to final consumers through refiner-owned service stations. 919 See Article 7(c) Vertical block exemption Regulation. 920 In the Distrigas Case mentioned above this problem has been overcome by using sales data rather than market share data.

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Although the market share threshold is the most prominent condition, there are two additional conditions for the safe harbour to apply. These conditions relate to other aspects of the arrangements between an energy supplier and its re-sellers. Firstly, vertical agreements – like horizontal agreements – must not contain “ directly or indirectly, in isolation or in combination with other factors under the control of the parties” 921 any hard-core restriction. Such restrictions are arrangements that have as their object to allocate territories or customers by territory or customer and resale price maintenance.922 Agreements that contain such restrictions lose the benefit of the block exemption in their entirely.

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Secondly, the duration of the non-compete obligation must not exceed five years. Buyers must be free to choose another energy supplier after this period of time. Non-compete obligations exceeding five years or which provide for tacit renewals beyond a period of five years are not covered by the safe harbour.923 Such clauses are subject to self-assessment. This means that they are prohibited by Article 101 when they are likely to adversely affect competition and do not generate countervailing efficiencies. There is no presumption that this is the case. Conversely, the fact that non-compete obligations contained in agreements, which due to the market share of the supplier is not covered by the block exemption, are shorter than five years does not imply that they are compatible with Article 101(1). If a dominant supplier could tie all its customers for five years only 20% of its sales would be contestable each year. In the case of a dominant firm with 80% market share, 64% of the market would thus be uncontestable in a given year, which under current case law would imply significant foreclosure.924

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There is an important difference between these two additional safe harbour conditions, with respect to the legal consequences that follow if they are not met. When an agreement contains a hard-core restriction it is the agreement as a whole that loses the benefit of the safe harbour.925 When the duration cap of five years for non-compete obligations is exceeded, it is only the non-compete

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921 See Article 4 Vertical block exemption Regulation. 922 See Article 4(a) & (b) Vertical block exemption Regulation. 923 See Article 5(1)(a) Vertical block exemption Regulation, Commission, Vertical restraints guidelines, paragraph 66, Appendix 4. The 5 year limitation does not apply to buyers selling the supplier’s goods from premises and land owned or leased by the supplier. Moreover, in Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, tacit renewal was accepted in contract involving large industrial users of electricity. 924 See in this respect Case C-552/03 P, Unilever Bestfoods, ECR 2006, p. I-9091, and Case T65/98, Van den Bergh Foods, ECR 2003, p. II-4653, and Case C-549/10 P, Tomra, 2012 ECR, page I-0000, paragraph 41. 925 See Article 4 Vertical block exemption Regulation.

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obligation that is no longer block exempted. The remaining parts of the agreement continue to benefit from the safe harbour to the extent that they are severable from the non-compete clause in accordance with the applicable civil law.926 Moreover, although the market coverage of the non-compete obligation is an essential factor for determining its potential to foreclose competition, it is not an additional condition for the safe harbour to apply. An energy supplier may thus tie up to 30% of total market demand and still benefit from the safe harbour provided that its overall market share does not exceed the threshold.

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The presumption of legality provided by a block exemption regulation may be removed through a withdrawal procedure. Withdrawal requires a formal decision of a national competition authority or the Commission, which would lift the benefit of the safe harbour and motivate why specified non-compete obligations of a certain supplier or suppliers restrict competition within the meaning of Article 101(1) and generate insufficient efficiencies, for Article 101(3) to apply.927 The decision will then prohibit these non-compete obligations for the future. Withdrawal is always associated with a prohibition procedure.

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Due to the market share threshold a number of gas and electricity companies operating in a relevant market may not be able to benefit from the safe harbour. By contrast, the safe harbour may be of more general importance to refiners, importers and wholesalers of petroleum products. This may be illustrated by one of the first cases to which the Commission applied the vertical block exemption Regulation of 1999. The Finnish company Neste sold motor-fuel through service-stations. It contractually imposed on service station operators buying from it a non-compete clause and exclusive purchasing obligation for a period of 5 years. Operators were bound not only to purchase Neste’s branded fuel directly from Neste but were also prevented from buying any competing fuel. At the time of the examination of the distribution agreements Neste held a market share not exceeding 30% of the Finish fuel retail market. The Commission investigated the competition conditions for the marketing of motor-fuel in Finland. It found that, besides Neste, there were several distribution networks of competing motor-fuel refiners and importers. Almost all of the other suppliers engaged in the same practice as Neste and made the sale of fuel to operators conditional on an exclusivity arrangement. Despite the widespread use of such restraints, the Commission found real opportunities for competitors of Neste to enter and ex926 See Article 5 Vertical block exemption Regulation. 927 See Article 29 of Regulation 1/2003. Member State competition authorities are authorised to withdraw the benefit of a block exemption regulation only where the relevant geographic market does not exceed the territory of their Member State.

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pand in the market. On average 20% of the distribution agreements came up for renewal every year. In addition, a new distribution channel of unmanned fuel stations with great potential was being developed inter alia by new entrants. The Commission did not consider it necessary to withdraw the benefit of the block exemption but insisted that Neste strictly observed the five-year duration limit. Consequently, the firm aligned the duration of land lease agreements, which it had concluded with some operators with that of the fuel distribution agreements.928 This removed an obstacle which potentially hindered operators from effectively terminating the supply contract with Neste at the end of the 5-year period. The case illustrates the fact that the approach to non-compete obligations is substantially less stringent in non-dominated markets.

2.1.3 Analysis in individual cases Non-compete obligations, which do not benefit from the safe harbour, are subject to self-assessment and that there is no presumption that they are prohibited by Article 101.929 An analysis of the likely effect on the market is necessary in order to ascertain whether or not such arrangements are caught by Article 101(1). In case they are caught, the efficiency defence of Article 101(3) may still apply. The burden of proof for demonstrating the restriction of competition and application of Article 101(1) is on the party alleging the infringement, while the burden of proof for demonstrating efficiencies and the application of Article 101(3) is on the parties having concluded the vertical agreement.930 All relevant market and competition-related factors need to be examined in order to assess whether a vertical restraint has likely negative effects on competition in the energy supply market concerned. The following discussion focuses on the most important competition issue relating to non-compete arrangements, i.e. the foreclosure of rivals from an energy market. The analysis of foreclosure is a complex task. The ensuing discussion deals first with the case of a single energy supplier enjoying market power and afterwards with the case of cumulative effects due to parallel networks or non-compete agreements concluded by suppliers collectively possessing market power.

928 See Commission Competition Report 2003, p. 193. 929 See Vertical restraints guidelines, paragraph 62, Appendix 4. 930 See Article 2 of Regulation 1/2003.

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• A single energy supplier with market power For a single energy supplier to substantially influence prices or output and unilaterally exclude competition, it must have substantial market power. Past practice of the competition authorities and the European Courts shows that market share is the key factor in this respect. An energy supplier is unlikely to possess on its own a sufficient degree of market power if it does not hold the highest market share. The higher the market share of the energy supplier compared to the market shares of its competitors, the more likely it is that the firm has substantial market power.931 Non-compete obligations are unlikely to adversely affect competition and consumers as long as the market share of the largest firm is below 30% and the aggregate share of the five largest firms remains below 50%.932

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The Commission furthermore indicates in its Guidelines on Vertical Restraints that foreclosure is more likely to occur where the exclusivity in question concerns contracts with retailers rather than with wholesalers or industrial buyers. Absent cumulative effects, it regards foreclosure at the wholesale level to presuppose a dominant position of the supplier except in the case of wholesale markets with very high entry barriers.933 The reason is that it is generally easier to establish alternative operations at wholesale level than at retail level. It is generally very difficult and costly to establish new retail outlets. Moreover, density of distribution is often important since it lowers costs. The Repsol case would seem to confirm this general approach also for the energy industry.934 In Repsol, the Commission identified significant foreclosure effects on a retail market inter alia because the market leader Repsol with market shares of 35-50% for motor-fuel products935 tied 25-35% or demand (see below, book paragraph 3.257).

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Substantial market power is only one of the conditions for Article 101) to apply to exclusive dealing practices by a single firm. In addition, a certain market coverage and duration of non-compete obligations are necessary. The higher the share of demand that is tied, the more likely it is that smaller rivals are constrained in their possibilities to enter or expand in the market. Moreover, the higher the market share of the supplier, the sooner non-compete obligations will 931 In Case C-413/14 P, Intel, ECLI:EU:C:2017:632, para. 139, the EU Court of Justice referred to the relevance of the extent of of an undertaking s market dominance. 932 See Vertical restraints guidelines, paragraph 135, Appendix 4 933 See Vertical restraints guidelines, paragraph 138, Appendix 4. This general orientation has found some support in the few cases decided by the European Courts, see for example paragraphs 113-118 of Case T65/98, Van den Bergh Foods ECR 2003, II-4653. 934 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 935 It was left open whether the refiner held a dominant position on the retail market in question.

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be deemed to cover a sufficient share of the market to produce likely foreclosure effects.936 The competitive advantages of the incumbent supplier are already such that competitors need numerous opportunities to compete for customers in order to secure a sufficient customer base. The market position of the incumbent implies that it will in any event win most contracts offered. It seems to follow from the Commission’s case practice that a tied market share of 20 to 25% is unlikely to raise competition concerns provided that the duration of the agreements does not exceed five years.937 Duration affects the share of demand that is contestable at any given moment in time. When the contracts are of very long duration the customers in question will not come back to the market and thus not be contestable for an equally long period of time. For instance, if a firm concludes on a rolling basis non-compete agreements of three years’ duration, covering 60% of demand, 20% of that demand is likely to be contestable in any given year. If the agreements were of 10 years’ duration, only 6% of the tied demand would come back to the market in any given year. There is thus a clear link between contact duration and the share of demand that is contestable in any given year and hence the scope for new entrants to compete for customers. However, the question remains whether duration is an issue independently of the link to the contestable share of demand. According to the Commission’s case practice this question must be answered in the affirmative. In recent cases it has required not only limitations on the non-contestable share of demand. It has also imposed a duration cap of five years.938 In some markets a limited number of customers are of particular strategic significance in the sense that they are the most likely to switch supplier and when they do they provide a significant basis for new entry. By tying such customers a dominant incumbent can thus achieve a high degree of foreclosure at a modest tied market share. The duration cap of five years seeks to ensure that the incumbent is unable to tie the most attractive customers for excessively long periods of time.939 It is submitted that from a foreclosure perspective, the contestable share of the market is the most critical element, since it determines the share of demand that competitors may compete for at any given moment in time. Duration is less significant unless it is really the case that a limited number of customers are considerably more likely to switch. At the same time, the duration cap may deprive certain custom936 See Vertical restraints guidelines, paragraph 133, Appendix 4. 937 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 35, and Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. 938 See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. 939 Id., paragraph 36.

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ers with particular needs of the benefits of long-term contracting. Competition authorities should therefore be wary of automatically limiting contract duration in addition to ensuring that a sufficiently high share of the market comes back to market on an annual basis.

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Non-compete contracts lasting for less than 1 year are generally not caught by Article 101(1) unless there it is a real possibility for a customer to have more than one supplier.940 Thus, in the Long-term contracts France case the undertaking concerned committed to offer (in addition to exclusive contracts) nonexclusive contracts that effectively allow the customer to contract for additional supplies with another customer.941 Given that in gas and electricity markets transportation contracts are normally not concluded for less than one year and that transportation is required to supply customers, it may be reasonable to assume that one year contracts are a standard feature of gas and electricity markets. In contrast, exclusivity obligations exceeding one year may raise foreclosure concerns. The one-year-period was largely surpassed in all energy cases dealt with by the Commission so far.942 •

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Agreements concluded by a group of energy suppliers

The Court of Justice has established that not only non-compete agreements concluded by a single supplier may have significant foreclosure effects. The same is true of parallel networks of agreements entered into by several suppliers943. This is the case when collectively such agreements make it difficult to gain access to the relevant market in question. Agreements that make an appreciable contribution to such a cumulative foreclosure effect are caught by Article 101(1). Cumulative foreclosure effects are particularly likely to arise when non-compete obligations are imposed by a small number of leading suppliers. However, given the fact that the principal competition concern is foreclosure of third parties, there is no need to show that the market is conducive to tacit collusion or that undertakings concerned are tacitly colluding. In other words, a cumulative effect may be established without a showing of collective dominance. 940 Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. 941 If dual supply is a realistic possibility, exclusivity as such may restrict competition. When due to exclusivity competition is an “all or nothing” game, it may be more difficult for new entrants to establish a foothold in the market. 942 See book paragraphs 3.249 et seq. 943 See Case C-234/89, Delimitis, ECR 1991, p. I-935.

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The Vertical Restraints Guidelines944 contain indications of when foreclosure concerns due to cumulative effects may start to arise. In the case of intermediate products a serious cumulative effect is unlikely to arise as long as less than 50% of the market is tied. For agreements concerning the supply of final products a distinction is made between the wholesale level and the retail level. As regards the latter it is presumed that the creation of new retail outlets such as petrol stations is difficult. As regards the former it first needs to be assessed whether entry at wholesale level is difficult. In its energy sector inquiry the Commission found that there are high barriers to entry into gas and electricity wholesale markets. The guidance provided in the Guidelines for retail markets is therefore considered relevant to gas and electricity wholesale markets. According to the Commission when all companies have a market shares below 30% a cumulative foreclosure effect is unlikely if the total tied market share is below 40%. When not all the undertakings concerned have market shares below 30% but none is dominant, a cumulative foreclosure effect is said to be unlikely if the total tied market share is below 30%. Individual suppliers with a market share not exceeding 5% are in general not considered to contribute significantly to a cumulative foreclosure effect.945

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Given that the supply side is relatively concentrated in many energy markets, substantial use of non-compete obligations in long-term distribution and supply contracts may in many instances give rise to substantial foreclosure effects. This seems to be particularly true in electricity and gas markets. In comparison, in the petroleum sector, foreclosure effects caused by non-compete clauses seem to occur mainly in the downstream segments of the vertical supply chain. Competition problems arise, as the Neste and Repsol cases illustrate, mainly in the relationship between petrol companies and their dealers.

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2.1.4 Efficiency defence – Article 101(3) EC In order to examine whether the economic benefits of a non-compete obligation compensate for its anti-competitive effects, the following four questions have to be answered in the affirmative. These are the same four questions as for horizontal restraints.946

944 See Vertical restraints guidelines, paragraphs 138 140 and 141. 945 See Commission de minimis notice, paragraph 8. 946 See above, book paragraphs 3.76 et seq.

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(1)

Does the non-compete obligation contribute to improving the production or distribution of energy products or contribute to promoting technical or economic progress?

(2)

Is the non-compete obligation indispensable to the attainment of the efficiency gains?

(3)

Do consumers receive a fair share of the economic benefits resulting from the non-compete obligation? The net impact of the anti-competitive and efficiency-enhancing effects of the non-compete obligation has to be at least neutral for energy users.

(4)

Does the non-compete obligation afford the possibility of eliminating competition in respect of a substantial part of the energy products in question? If the non-compete obligation to contribute to the elimination of a very important element of competition such as price competition on an energy market on which competition was already limited, the efficiency defence cannot be invoked.

Vertical agreements (like horizontal agreements) may create efficiencies by allowing the undertakings in question to perform a particular task at lower cost or with higher added value for consumers. Vertical agreements may reduce transaction and distribution costs. They may also be necessary to underpin new investment by either party. For instance a long-term gas supply agreement may be necessary in order to underpin investment in a new gas fired power plant.947 •

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Cost efficiencies

A very common claim is that non-compete clauses allow the energy supplier to better plan production and keep lower inventories. This defence is very often combined with the claim that the vertical restraint leads to savings in logistic costs due to economies of scale in transport and distribution. To qualify as an efficiency gain, the supplier would have to calculate or estimate as accurately as reasonably possible the value of the cost savings and describe in detail how the amount has been computed on the basis of verifiable data948. In addition to the efficiency gain, the supplier must convincingly demonstrate that the three other 947 This is recognised in Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. Contracts with electricity producers buying gas for a new installation exceeding 10MW are excluded form the commitments in order to allow for a case-by-case analysis of whether a duration of more than 5 years is required. 948 See Guidelines on the application of Article 101(3), paragraph 56.

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conditions of Article 101(3) are satisfied. In this respect, it may be particularly difficult to establish that consumers receive a fair share of the benefits. To the extent that the non-compete obligation allows the supplier to increase prices or maintain supra-competitive prices because of the foreclosure of rivals or collusion, the costs savings must be passed on to such an extent that consumers are no worse off. This is a difficult test to meet in energy markets where low elasticity of demand means that price reductions will not significantly increase sales.949 Thus, when the restrictive agreements are concluded by a dominant supplier the incentive to pass on cost savings is limited. In more competitive markets the incentive may be greater since the elasticity of demand for each individual supplier’s products is higher than the elasticity of demand of the overall market. Individual suppliers can expand sales by stealing business from their competitors. However, even then the consumer pass-on condition is unlikely to be satisfied when the exclusivity requirement creates significant additional entry barriers and the efficiency gains are modest.950 •

Facilitation of new market entry

The use of non-compete obligations to facilitate market entry of an energy supplier would prima facie constitute a valid efficiency defence, to the extent that such obligations restrict competition in the first place.951 Indeed in such cases it is unlikely that the agreement has any likely negative effects on competition. The Synergen case arguably provides an example of this defence. Statoil concluded an exclusive gas supply contract for 15 years with Synergen, a joint venture created for the purpose of constructing and operating a new power plant in Ireland. This contract was the first large-scale gas supply contract in a market previously dominated by a single incumbent. It immediately gave the new entrant a market share above the de minimis threshold. The non-compete obligation thus possibly fell within the scope of Article 101(1) but was considered to be justified by efficiency considerations in accordance with Article 101(3).952 Arguably, however, the agreement was not caught by Article 101(1) in the first place. The contract paved the way for new entry and in dominated markets it is unlikely that non-compete obligations entered into by new entrants are the source of significant foreclosure problems. It is much more likely that contracts entered 949 See above book paragraph 3.88. 950 See Case T-9/93, Schöller, ECR 1995, p. II-1533, paragraph 143 seq., Case T-65798, Van den Bergh Foods, ECR 2003, p. II-4653, paragraph 139 seq. and Guidelines on the application of Article 101(3), paragraph 91. 951 See Case T-112/99, – Métropole télévision (M6), ECR 2001, p. II- 2459, paragraphs 141 seq. 952 See Commission Competition Report 2002 page 192 seq. and press release IP/02/792 of 31.05.2002 – Synergen.

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into by the incumbent are the real cause of foreclosure concerns. In that case enforcement actions should be targeted at the dominant firm and not new entrants that try to compete with the incumbent. Article 101(1) must be applied in light of the legal and economic context in which the agreement occurs. It is therefore entirely justified and necessary to distinguish between incumbents and new entrants when analysing issues to market foreclosure. •

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Another defence perhaps typical for the petroleum sector is that a non-compete clause serves the purpose of securing the loan that the supplier grants its distributor. The claim appears to be used particularly for distribution agreements between petrol companies and service-station operators as the Repsol case demonstrates953. The Commission shows in its Guidelines some reluctance to accept this efficiency defence. Whenever it is equally possible to arrange the loan agreement through a commercial lender, the Commission does not regard the grant of a loan as efficiency enhancing. However, in a situation where the energy supplier is the only option for the buyer to obtain capital or to obtain it at lower cost for its business at least at the time of the conclusion of the loan agreement, the loan can be regarded as an efficiency gain. A non-compete obligation or a minimum purchase obligation may then be indispensable to secure the loan. However, it is unlikely that the buyer may be tied for the whole duration of the loan agreement. Indeed, the buyer should be allowed to terminate the supply and loan agreement at its discretion and repay the loan. If the non-compete obligations give rise to competition concerns, energy suppliers must not prevent their buyers from terminating the non-compete covenant and repaying the outstanding part of the loan at any point in time and without payment of any penalty.954 •

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Securing loans

Investment

Non-compete arrangements are likely to be viewed favourably when they are necessary to underpin an investment by the supplier (or the buyer, see below). However, the supplier would generally have to show that the investment is relationship-specific, asymmetric and can only be recouped within the time period for which the non-compete clause applies.955 Relationship-specific means that the supplier must make the investment solely for the purpose of carrying out a 953 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 954 See Vertical restraints guidelines paragraph 156. See also Commission Competition Report 2003 page 194 seq – BP Lubricants and page 191 seq. – Interbrew. 955 See Vertical restraints guidelines, paragraph 107(d), Appendix 4.

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specific contract containing the non-compete clause with an individual customer. The investment cannot be used to supply other customers, or, once made the investment must be such that the assets could only be sold to another supplier at significant loss. In such circumstances the non-compete obligation has the function of lowering the investment risk of the supplier by obliging the customer to procure all of its requirements from the former. Furthermore, it is a condition that the supplier invests more than the customer to implement the contract. Otherwise both parties would be equally locked-in and a non-compete obligation would be superfluous. An asymmetric relationship-specific investment is generally efficiency enhancing for the period of time needed to recoup the investment. Should the investor be able to recoup the investment in the shortterm, the efficiency gain will also only be short-term. The Commission estimates in its Guidelines that most investments do not necessitate exclusivity for more than five years. Only high relationship-specific investments are capable of justifying longer-term exclusivity. Non-compete obligations need thus to be well founded on the basis of accurate and verifiable calculations linking them to specific investments in order to demonstrate their beneficial effects for the duration of the non-compete covenant.956 However, given the fact that the agreement restricts inter-brand competition it is not sufficient to justify the restraint that the parties can show that in the absence of the restraint the agreement would likely not have been concluded. It may be that due to the foreclosure effect consumers are better off without the agreement and the investment that it underpins. It must therefore be shown that consumers receive a fair share of the benefits. Investments by the buyers may also justify long-term supply arrangements. The construction of new power plants, for example, might justify long-term supply contracts containing non-compete obligations. The buyer making the investment may need to conclude a long-term supply agreement with a stable price in order to secure financing.957 The supplier may be unwilling to offer such prices in the absence of a non-compete obligation as it would allow the buyer to engage in cherry-picking, sourcing under the contract when it is commercially interesting and turning to third parties when market prices fall below the contract price. Such relationship-specific investments are unlikely to harm consumers when they lead to an increase in market output. Instead of the exclusivity obligation however, an obligation to purchase minimum quantities (“quantity-forcing”) may be a sufficient and less restrictive means to lower the investment risk. If so, 956 See Vertical restraints guidelines, paragraph 107(d) and 146, Appendix 4. 957 This is the reason why in the Distrigas case investments in new power plants exceeding 10 MW were excluded from the scope of the commitments, see Commission Decision of 11.10.2007, Case COMP/37.966 Distrigas. In such cases the Commission did not consider the five-year duration limitation appropriate.

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the non-compete obligation is not indispensable to achieve the benefit of the investment.

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Given the fact that Article 101(1) only applies in case of significant foreclosure effects and given the conditions for applying Article 101(3) is it likely that the investment argument is capable of justifying non-compete obligations on energy buyers? It is undeniable that especially energy suppliers such as electricity generators, gas or oil producers or petroleum refiners regularly make significant investments in order to satisfy increasing demand or to meet changing consumer preferences. Furthermore, the energy industry is known for the long-term cycles of some of its investments. Likewise, these investments are generally asymmetric. However, they are not necessarily made for the purpose of carrying out specific supply agreements with individual clients. The construction of a new power plant, the development of a new gas or oil field, or the construction of a new refinery are typically meant to serve a large number of non-specific buyers. The same is true for investments in additional production capacity. The energy industry is in this regard hardly different from other sectors producing homogeneous goods. For most investments no direct causal link therefore exists between the non-compete obligation and the investment, and in such circumstances the vertical restraint is not indispensable for the investment958. Most investments of the energy industry are market-specific but not relationship-specific. This does not exclude cases, of course, where, for example, an ownership-unbundled transmission system operator wishes to secure peak power supplies on a long-term basis for balancing959. The power generator which has to invest in its portfolio of power plants to meet such specific demand at lower than average market prices may thus ask for the acceptance of a non-compete obligation by the network operator until the client-specific investment is recouped. Even in such a case the supplier may however have to consider whether a sweeping non-compete clause is indispensable. The less restrictive alternative of quantity forcing may serve the same goal as a non-compete obligation. The parties could thus agree to only oblige the network operator to purchase certain minimum quantities of peak power within a pre-determined period of time in case there exists a risk that an exclusivity arrangement is caught by Article 101).

958 See Guidelines on the application of Article 101(3), paragraph 54. 959 This consideration may also be taken up as a security of supply defence; see the Commission proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure development of 10.12.2003, COM(2003) 740 final, available on DG TREN’s website: http://europa.eu.int/comm/energy/electricity/infrastructure/com_proposal_2003_en.htm.

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Long-term supply obligations are more likely to be viewed favourably when they protect the buyer rather than the seller. While such contracts may give rise to input foreclosure if they tie a large share of available supplies.960 They may be requited to underpin investments in new capacity961. In such cases long-term supply obligations and volume commitments on the supplier may be justified, since in their absence the buyer may be subject to opportunistic behaviour once the investment is made962. For instance, due inter alia to transport costs there are clear efficiency gains from constructing lignite fired power plants close to the mine from which the fuel is supplied.963 Once the plant is built the buyer becomes highly dependent on the operator of the mine and a long-term supply contract is likely to be necessary to underpin the investment. Absent such agreement the buyer would be exposed to opportunistic behaviour by the seller. On the other hand, it is unlikely that it would be justified for the buyer to impose a non-compete obligation on the seller. Such obligations may deny third party access to a scarce resource without being necessary to protect the buyer’s legitimate interests. These interests will generally be sufficiently protected by longterm volume commitments. •

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Security of energy supply

The enhancement of security of energy supply qualifies as an efficiency gain. The Commission confirmed in the Electrabel case that it regards supply security as a potential efficiency stemming from agreements containing non-compete obligation.964 An energy supplier invoking the defence would, generally speaking, have to show that the practice of imposing non-compete obligations in downstream supply contracts with consumers and resellers enhances upstream security of supply. The supplier would have to clarify, as a first step, which concrete risks threaten energy supplies. Examples might include commercial risks such as, for instance, imbalance of electricity supply and demand and the dependency of European suppliers on external sources of energy. The supplier would then, as a second step, have to demonstrate how non-compete obligations mitigate the identified risk. 960 See in this regard Commission Decision of 5.3.2008 on the granting or maintaining in force by the Hellenic republic of rights in favour of Public Power Corporation for extraction of lignite. 961 See Commission Decision of 11.10.2007, Case COMP//37966 – Distrigas, paragraph 37. 962 See Vertical restraints guidelines, paragraph 107(d), Appendix 4, on the so-called “ hold-up” problem. 963 See Commission Decision of 5.3.2008 on the granting or maintaining in force by the Hellenic republic of rights in favour of Public Power Corporation for extraction of lignite, paragraph 13. 964 See book paragraph 3.259.

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The existence of commercial risk has in the past most forcefully been made in relation to the European Union’s dependency on external gas sources. While the 2017 Regulation concerning measures to safeguard the security of gas supply does not refer explicitly to the benefits of long-term supply contracts, gas supply contracts remain key to the assessment of security of supply.965 Moreover, the fact remains that long-term contracts may contribute to secure supplies e.g. by underpinning large scale investments of producers in the search, exploration and production of gas as well as investments in the construction of links between upstream pipelines and the downstream trans-European network. Such investments may open up new sources of supply and secure existing ones. The volume commitments made by the parties to long-term supply agreements may also promote security of supply and market liquidity since they create an expectation that these minimum volumes will be marketed. Certain vertical restraints such as a long-term purchase and supply commitments may thus prima facie be justifiable under Article 101(3). However, this does not mean that such longterm non-compete obligations are always justified. The justification will have to be provided for each individual contract.

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The security of supply arguments in favour of non-compete obligations in downstream supply and distributor contracts are less obvious. In order to benefit from Article 101(3) in such circumstances, a number of questions must be considered and answered convincingly in order to justify non-compete obligations that significantly foreclose the market. These questions are particularly relevant in relation to non-compete obligations imposed by gas importers on their customers. The first question relates to the causal link between the non-compete obligation and the claimed benefits. Why is it necessary to require downstream customers to purchase all or almost all of their requirements from the importer in order to enhance supply of security? In general, the fact that a supplier has committed to purchase a certain input long-term does not justify the imposition of noncompete obligation on downstream customers to guarantee that the input can subsequently be sold. Investing in capacity forms part of normal business risks. Any firm that buys an input must find customers willing to buy that input. The more markets integrate the greater the scope for finding the required number of customers. Moreover, the import contracts generally provide a certain degree of flexibility for the importer to adjust the off take. It is therefore not clear that there is a causal link between security of supply and non-compete obligations. The second and related question addresses the indispensability condition of the efficiency defence. Why is it indispensable for security of supply that customers 965 See Regulation 2017/1938 concerning measures to safeguard security of natural gas supply (“Gas Security Regulation”), OJ L280/1 of 28.10.2017.

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of importers have to accept exclusivity obligations irrespective of whether and to which extent the latter actually “invest” in purchases from third country sources, keeping in mind that the application of Article 101(3) arises only when the noncompete obligation has market foreclosure effects? The third question refers to the fact that not only importers but also regional and local distributors may impose non-compete obligations on their customers. What is the justification for extending non-compete obligations to this level given the fact that these distributors are not taking risks comparable with those of the importers? Finally, the practice of requiring energy customers to submit to exclusive and long-term purchasing obligations would also not appear to be compatible with the further conditions of Article 101(3), notably that consumers have to be compensated for the negative impact of the competition restrictions and that, at any rate, competition is not eliminated. Consumers may benefit from the conclusion of long-term large volume contracts with gas producers active in third countries. However, after the liberalisation of gas markets, consumers also benefit from competition in the internal market and a mix of contractual arrangements is arguably the most appropriate means of reconciling different needs and objectives and ultimately ensuring supply security. In conclusion, efficiency gains on the grounds of cost efficiencies, new market entry, loan agreements, investments and security of energy supply may satisfy the conditions of Article 101(3). However, none of these efficiency defences offer a ‘carte blanche’ for imposing non-compete obligation. When such agreements have significant foreclosure effects, which is required for Article 101(1) to apply in the first place, careful scrutiny of all four conditions of Article 101(3) is required and it is unlikely that the defence will apply in great many cases. The most promising case is new investment by the buyer. In particular when such investment paves the way for new entry. In such cases the likely negative effects are limited and the pro-competitive effects are likely to be significant.966 Indeed, long-term contracts concluded with new entrants or small incumbents are unlikely to be caught by Article 101(1).

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2.2 Individual cases dealt with by the Commission The following cases dealt with by the Commission all concern long-term noncompete obligations. The Distrigas case concerns long-term gas supply agreements with industrial users and power producers, while the Repsol case concerns distribution agreements with motor-fuel retailers. The subject of the Gas Natural/Endesa proceeding was a long-term de facto exclusive gas supply agree966 See Guidelines on the application of Article 101(3), paragraph 90.

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ment with a power generator. The Electrabel case concerned a supply relationship between an electricity generator and local distribution companies. 2.2.1 Distrigas

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This case, in which the Commission adopted a decision pursuant to Article 9 of Regulation 1/2003,967 concerns Distrigas, the incumbent gas supplier in Belgium.968 Article 9 decisions do not make any finding of whether there was or still is an infringement.969 They only conclude that in light of the commitments, which are rendered binding, there are no longer grounds for action. This means that Article 9 decisions are rather succinct in terms of analysing the identified competition problems. However, they provide valuable guidance on the action required to remedy such problems. While Article 9 decisions cannot create a legitimate expectation in respect of the undertakings concerned as to whether their conduct complies with Article 101 TFEU, the EU Court of Justice has made clear that nonetheless, national courts cannot ignore such decision. Such acts are Commission decisions. In addition, both the principle of sincere cooperation laid down in Article 4(3) TEU and the objective of applying EU competition law effectively and uniformly require the national court to take into account the preliminary assessment carried out by the Commission and regard it as an indication, if not prima facie evidence, of the anticompetitive nature of the agreement at issue in the light of Article 101(1).970 According to the Commission’s preliminary assessments in this case, Distrigas is dominant on the market for the supply of gas to large customers in Belgium (possibly sub-divided into separate markets for different types of customer such as industrial customers, electricity producers and resellers). With very few exceptions, customers only had one gas supplier and therefore competition in the gas supply market only took place when a contract expired and a new contract was concluded. The Commission expressed concern that Distrigas’ long-term gas supply contracts would prevent customers from switching and thereby limit the scope for other gas suppliers to conclude contracts with customers and so foreclose their access to the market.

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See Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas. See also Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France. See recital 13 of Regulation 1/2003 Case C-547/16, Gasorba, ECLI:EU:C:2017:891, paras. 28 and 29.

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To address these concerns Distrigas offered the commitments set out below. –

Distrigas undertook to ensure that for each calendar year a minimum of 65% and on average for all calendar years a minimum of 70% of the gas volumes supplied by itself and connected undertakings to industrial users and electricity producers in Belgium returned to the market, i.e. alternative suppliers could make a competing offer to the customers concerned.971 The volumes were calculated on the basis of Distrigas’ annual contract quantities (including existing contracts) and Distrigas had some flexibility to account for fluctuations over the years. If Distrigas’ total sales decrease from their 2007 level, then Distrigas was not be deemed to have violated the commitments if the volume that did not return to the market was not more than a certain fixed volume of gas sales which represented at most 20% of the total market(s) concerned. The tied market share is the most relevant measure of the likely foreclosure effect of the agreements. However, since the application of this measure presupposes knowledge of the size of the market, the tied share of the undertaking’s own sales may be used as a proxy.972 This measure is easy to apply since the undertaking concerned will know its own sales. Moreover, as long as the parties have a fairly good understanding of what these sales represent in terms of market share, they are able to estimate with a sufficient degree of certainty how much of overall demand the undertaking concerned is permitted to tie. The commitments reflect the so-called foreclosure model which seeks to ensure that a substantial part of demand is contestable every year rather than impose a fixed maximum contract duration. This approach addresses directly the issue of foreclosure and allows at the same time more freedom for the undertaking concerned to organise its overall portfolio of contracts. By accepting that Distrigas could have a tied market share of approximately 20%, the Commission signalled that this level of tied market share does not significantly foreclose the market (at least in this case). Moreover, within the limits of the commitments Distrigas could conclude contracts of varying duration to suit the business needs of its customers. This flexibility is illustrated by the following combinations which would all be possible under the commitments:

971 In Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France the thresholds are slightly lower, namely 60% and 65%, which in that case the Commission considered sufficient. The reasons for this difference in assessment are not spelled out. However, it may be that due to the much larger size of the French market the Commission took the view that a lower percentage share of sales ensured competitors sufficient opportunities to compete. The Commission may also have taken the view that the long-term contracts generated greater benefits for consumers of electricity than gas because of the greater scope for linking pricing mechanisms to low cost production sources. 972 Clarity is important. If commitments are breached the Commission may impose very significant fines, see Article 23(2)(c) of Regulation 1/2003.

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–

37.5% supplied under 5 year contracts and 62.5% supplied under 1 year contracts

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40% supplied under 4 year contracts and 60% supplied under 1 year contracts

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45% supplied under 3 year contracts and 55% supplied under 1 year contracts

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60% supplied under 2 year contracts and 40% supplied under 1 year contracts

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No new contract with industrial users and electricity producers would be longer than five years. Existing contracts with a duration of five years or more were granted unilateral termination rights with prior notice and without indemnity, which allowed Distrigas as a transitional measure to treat them as one year contracts.973 Distrigas would not conclude any gas supply agreements with resellers with a duration of over two years and Distrigas would not include any use, resale or destination clauses or any tacit renewal clauses in future gas supply agreements and would remove (or not enforce) any such clauses from existing gas supply agreements. The five-year duration limit reflects the limits contained in the Vertical Restraints block exemption, which was also applied in the Repsol case (see below). The two-year limitation applied vis-à-vis resellers is the same as that imposed by the Bundeskartellamt in its decision concerning the supply of gas to Stadtwerke.974

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The following sales were not covered by the commitments: (i) volumes supplied to industrial customers with a consumption of less than 12 GWh, (ii) electricity producers buying gas for a new installation exceeding 10MW, (iii) intra-group sales, (iv) Distrigas’ trading activities and (v) sales outside Belgium. The exclusion of supplies to new electricity generation installations is due to the fact that for such customers the 5-year duration limitation may not be appropriate. Longer duration may be required to underpin an efficiency enhancing investment. Case-by-case analysis is therefore required.

973 In Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France unilateral termination rights were also accepted for new contracts. It is submitted that this greater measure of flexibility is justified. It benefits the customer and in the case of large industrial users there is no reason to believe that an opt-out renders the customer less contestable that contract expiry at the same point in time at which the customer can exercise the opt-out. 974 See Decision of 13.01.2006 – Langfristige Lieferverträge (Case B8-113/03).

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The commitments had a duration of four years. During this period the commitments applies as long as Distrigas held a share of more than 40 percent of the market and at least 20 percent more than the share of its nearest competitor.975 The decision is based on the premise that Distrigas holds a dominant position on the relevant market. The market share thresholds contained in this release clause was intended to be a proxy for dominance. It follows that the Commission assumes that Distrigas was unlikely to be dominant when its market share fell below 40% as well as when the gap between Distrigas and its nearest competitor was less than 20%.

2.2.2 Repsol This was one of the first Commission cases in which it accepted commitments under Article 9 of Regulation 1/2003.976 Repsol, the Spanish refiner and distributor of fuel for motor vehicles held, at the time of the Commission’s investigation, market shares of 35-50% on the Spanish wholesale and retail markets for motor-fuel.977 The company distributed its products through service stations, which were contractually obliged to source all of their fuel requirements from Repsol. More specifically these non-compete obligations were imposed in 1,430 agreements with operators of stations owned by Repsol, 770 stations owned by the operator and 460 stations for which the owner had granted Repsol a right in rem to the usufruct. As usufructuary, Repsol made an investment in the station and leased it back to the owner or a third party linked to the owner. The Commission considered that the latter two categories of agreements, which allowed Repsol to tie 25-35% of the market to itself for 5 to 40 years, depending on the type of distribution agreement, might significantly foreclose the market. The Commission took the view that competitors of Repsol would not be able to attain within a reasonable period of time the minimum number of outlets necessary for the economic operation of a distribution system and thus make an effective entry into the Spanish market. As Repsol proposed commitments to meet the foreclosure concerns, which were accepted by the Commission. The main commitments provide that Repsol: –

Offered the operators of service stations in which it had made investments (the usufruct stations) the possibility to buy back the stations (i.e. repay the loan) at market value. The commitments set out a complex for-

975 In Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France the commitments are made binding for 10 years and EDF is released from the commitments if its market share falls below 40% for two consecutive years. 976 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 977 Only on a niche market Repsol held slightly lower shares of approximately 30-45%.

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mula for compensating Repsol for early termination while maintaining the incentive for the station operator to terminate the agreement; –

Advertised in advance the expiry of fuel distribution contracts with its service stations and the option for stations to terminate the agreement so as to promote the effective exercise of the right granted under the commitments;

–

Committed not to acquire service stations supplied by competing brands. This obligation applied until 31 December 2006;

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Observes a five-year maximum duration for future fuel distribution agreements with operators of service stations of which Repsol is not the owner.978

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The dominant Spanish gas importer Gas Natural with a market share of approximately 90% entered into a long-term gas supply contract with the leading electricity generator Endesa. The agreement was one of the first of its kind to supply new generation CCGT power plants in Spain. Both parties agreed that Endesa would de facto exclusively cover its gas requirements for the foreseeable future from Gas Natural. This had the effect, according to the Commission, that potential entrants into the Spanish gas market, which had only recently been liberalised, would lose one of the most attractive clients for a long period of time. The Commission terminated the procedure after the companies agreed to reduce the contracted gas volumes after an initial phase. The freed-up volumes were sufficiently large to allow new market entry on the basis of Liquefied Natural Gas, which was one of the most important supply sources of the Spanish market. This undertaking by the parties effectively removed the exclusivity arrangement. Moreover, the duration of the gas contract was reduced by one third. In spite of this reduction the duration remained relatively long, approximately twelve years. It would seem that the Commission considered the agreement partly procompetitive due to the fact that it allowed Endesa to secure a stable and predictable price for gas supplies to at least some of the power stations it intended to build.979 Thus, it illustrates the balancing of foreclosure effects and efficiency gains in terms of new investments. 978 See Commission Decision of 12.4.2006, Case COMP/38.348 – Repsol. 979 See Commission Competition Report 2000 p. 154 seq.; Press Release IP/00/297 of 27.03.2000; Mariano Fernandez Salas, “Long-term supply agreements in the context of gas market liberalisation: Commission closes investigation of Gas Natural”, Newsletter 2000 (2) p. 55 seq.

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2.2.4 Electrabel/Mixed intercommunal electricity distribution companies The Belgian electricity company Electrabel was the traditional supplier of electricity to 17 communal distribution companies. These distributors sold the power through their grid to Belgian consumers. Each of the 17 distributors held a legal monopoly for the supply of electricity in their commune. The distributors were called “mixed intercommunal companies”. This means that the commune they supplied electricity to shared the ownership of the local electricity supply company with a private partner. This partner was in all cases Electrabel, which in addition carried out the day-to-day distribution functions. The statutes of the companies granted Electrabel the exclusive right to supply the electricity required for resale to their customers. In 1996 new statutes were adopted simultaneously by all companies having the effect of prolonging the non-compete obligation in favour of Electrabel by 20 to 30 years depending on the distribution company concerned.

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The Commission found that Electrabel accounted for 90% of all electricity produced and the 17 distributors for 82% of all electricity distributed in Belgium. It concluded that the renewed statutes would foreclose a significant part of the Belgian wholesale electricity market as well as the market for the supply of distribution services for a long period of time. In response to the Commission’s invitation to modify the statutes in order to avoid the initiation of proceedings and a prohibition on the basis of Articles 101 and 102, the parties undertook that Electrabel would cease to supply electricity to the distributors under the contracts in 2011 and lift the exclusivity for 25% of the requirements of base load from 2006. The 25% figure represents the capacity of 5 medium-sized gas turbine stations or 1 nuclear power station. In addition, Electrabel committed not to oppose the dissolution of the distribution companies after 2011, if the communal shareholder wished to have a different partner for the supply of distribution services. The Commission accepted the commitment of the parties in view of the fact that the principles of security and regularity of supply were of particular importance to the communes.980

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This case and the solution found for the competition issues it raised must be seen against the background of 1997 when the case was settled. At that time the Electricity Liberalisation Directive of 1996 had just been adopted. It foresaw a market opening from February 1999, commencing with large industrial consumers. It did not provide a date for full market opening. Moreover, it left it

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980 See Commission Competition Report 1997, p. 150 seq. and press release IP/97/351 of 25.04.1997.

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to the discretion of each Member State whether or not to grant distributors surpassing a certain purchasing volume the right to freely choose their supplier.981 Only 6 years after the settlement in this case, in 2003, the Council and Parliament decided in favour of full market opening. All non-household customers, including distributors, have been free to select their electricity supplier since July 2004. Household customers have been in the same position since 1 July 2007.

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Taking these historical facts into account the settlement gave the communal distributors the right to freely choose their supplier well before this right was generally granted at Community level, as well as the right to choose in future an alternative partner for carrying out the day-to-day distribution business. This complementary measure appears to be essential for communal distribution companies to arrive at truly independent procurement decisions, as examples in other Member States shows.982 The reference to security and regularity of supply made in the published case report by the Commission has to be seen in the light of the strong market position of Electrabel and the transmission constraints importers faced when they wanted to enter the Belgian market.983

3.

Partitioning of energy markets by territory or by customer

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Vertical restraints determining where the buyer may resell the goods or services covered by the agreement are common in distribution or sales agreements. In the energy industry such arrangements may also be part of transport, service or other contracts. Resale restrictions constitute the second major category of vertical restraints of particular relevance to the energy sector.

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Markets can be partitioned through vertical arrangements in very much the same way as through horizontal agreements. Accordingly, firms may seek to restrict customers in the resale of energy products by obliging them to observe certain limits regarding the territory into which or the class of customers to whom they sell. Such vertical restraints aim at allowing energy suppliers to determine to which degree their customers, as resellers, may enter into intra-brand competition with the supplier as well as with other re-sellers served by the supplier. Moreover, vertically integrated energy suppliers may impose market-partitioning restraints on rivals when providing transport services to them, in order to eliminate or reduce the competitive constraint imposed by such rivals. From a com981 See Article 19(3) Electricity Liberalisation Directive 1996. 982 See Commission decision of 17.12.2002, Case COMP/M.2822 – EnBW/ENI/GVS, paragraphs 54 seq. 983 See Commission decision of 23.12.2002, Case COMP/M.2857 – ECS/IEH, paragraph 13 seq.

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petition policy perspective, resale restrictions in vertical agreements may give rise to serious competition concerns. It follows from Article 4(b) of the vertical restraints block exemption that the restriction of the territory into which or the customers to whom the buyer may sell the contract goods are considered hardcore restrictions of competition. Such restraints have as their object and effect the partitioning of the internal market.984 Resale restrictions are thus likely to be caught by Article 101(1) and unlikely to benefit from the exception rule of Article 101(3).985 The main exception is where the restraint is objectively necessary for the distributor to enter a new market. In such cases where in the absence of the restraint the agreement would likely not have been concluded, the agreement does not restrict (intra-brand) competition that would otherwise have occurred and is therefore not caught by Article 101(1).986 A limited exception to this general ban on market partitioning arrangements applies to exclusive distribution agreements. Through such an agreement the supplier undertakes to sell its goods and services only to the other party and not to any other reseller for distribution in a certain territory or to particular customers987. EU competition law allows the supplier to protect exclusive distributors against intra-brand competition through “active selling” to the reserved territory or customers. However, exclusive distributors cannot be shielded against intra-brand competition through “passive selling” by rival distributors. Exclusive distribution agreements are dealt with in some detail below. However, before doing so, the general approach to resale restrictions is addressed first.

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3.1 Direct market partitioning by territory Direct market partitioning is usually accomplished by an express obligation on the purchaser to resell certain goods only to customers in specific contractually defined territories. Such arrangements generally fall into the category of hardcore restrictions.

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3.1.1 The Commission proceedings against destination clauses The Commission has intervened over the years against gas producers inserting so-called “ destination clauses” in their gas supply contracts with European im984 See e.g. Case C-551/03 P, Opel Nederland, ECR 2006, p. I-3173, paragraph 67. 985 See Vertical restraints guidelines, paragraph 47, Appendix 4. 986 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 18(b). 987 See Vertical restraints guidelines, paragraphs 50, 109, 161, 178, Appendix 4.

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porters and such clauses remain an enforcement priority.988 The clause would stipulate, for example, that “the natural gas to be supplied under this contract shall be used only in … (Member State of destination) … and shall not be reexported”. Such territorial sales restrictions had the object of limiting the importer’s marketing activity to the Member State in which it was traditionally established and usually controlled the gas grid. Since most producers applying the destination clause sell their gas via several importers within the European Union, the destination clause prevented competition amongst importers, certainly for the sale of the gas originating from the same source (intra-brand competition). The territorial sales restrictions applied by these producers significantly contributed to the effective vertical demarcation of the historical sales territories of many gas importers within the EU. Moreover, the destination clause may also have affected the prices charged to the different importers. Gas producers usually price their product in view of the importer’s specific market conditions such as competing fuels and regulation, (“market value principle”). This price is then adjusted taking into account transport costs between the agreed delivery point and the point where the gas enters the importer’s traditional sales territory. The netback principle generally has the effect of significantly lowering gas prices for those importers whose sales area is further away from the delivery point (“netback principle”).989 The destination clause thus protected price differentiation across buyers by preventing arbitrage.

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Destination clauses conflict with the fundamental goal of the European Union to create an internal market for gas. Destination clauses are therefore not compatible with Article 101(1). Being a hard-core restraint, the efficiency defence of Article 101(3) is unlikely to apply.

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In the early 2000s, the Commission investigated the practice notably of the Russian, Algerian and Nigerian gas producers, Gazprom, Sonatrach and NLNG to impose territorial sales restrictions. However, contrary to normal practice in the case of hard-core restrictions the Commission did not adopt a prohibition decision with fines. Instead, it invited as a first step Gazprom, Sonatrach and NLNG to commit to the Commission not to insert destination clauses or any substitute territorial sales restrictions in new gas supply contracts which they did.990 With 988 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe. 989 See H. Nyssens, (I. Osborne, Profit splitting in a liberalised gas market: the devil lies in the detail, Competition Newsletter 2005 (1) p. 25 990 See Commission press releases IP/02/1869 – NLNG of 12.12.2002 and IP/03/1345 of 6.10.2003 Gazprom/Sonatrach. The Commission had also invited other gas producers to state that they are not using, nor intending to use, territorial sales restrictions in their contracts while the case against the destination

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respect to existing long-term gas supply contracts, the Commission did not immediately initiate formal proceedings against the producers, which would have been the normal course of action, but invited them to remove the destination clause and, if necessary, amend their contracts. The producers were therefore given the opportunity to find a commercial solution to the competition problem. This meant that the legal validity of the existing long-term contracts was not put into question. One of these Commission cases against territorial sales restrictions is particularly noteworthy. In this case Gazprom and ENI agreed not only to delete the destination clause from all their supply contracts and refrain from inserting the contested clause in new agreements. The amended contracts also provide for two delivery points for the gas as opposed to only one in the past. ENI is free to take (or re-deliver) the gas to any destination of its choice from these two delivery points. The addition of another delivery point appears to serve the purpose of facilitating cross-border sales. In order to ensure the effectiveness of the remedy, ENI entered into a firm commitment towards the Commission to offer “significant” gas volumes to interested customers outside its home market over a period of five years. Should ENI be unable to sell sufficient volumes through bilateral contracts, it committed to organising an auction for the delivery of gas at one of the hand-over points.991

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More recently in Upstream Gas Supplies in Central and Eastern Europe the Commission intervened against destination clauses implemented by Gazprom in long-term gas supply contracts concluded with importers in eight Member States.992 Gazprom committed to eliminate a variety of clauses that according to the Commission made the free flow of gas impossible or financially less attractive including profit-splitting mechanisms,993 expansion clauses and monitoring and metering provisions that restricted the re-sale of gas. Expansion clauses provide a right for the seller to increase the minimum annual quantities of gas (the take-or-pay obligation) in case a customer was to re-export some of the annual gas quantity. In Gazprom’s contracts the increase of the minimum annual quantity matched the amount of gas re-exported by a customer. These clauses were also accompanied by an obligation to inform Gazprom about all export quantities. The Commission took the preliminary view that – much like desti-

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clause was running, see press release IP/02/1084 of 17.07.2002. This was apparently intended, as this press statement and the previously mentioned statement IP/02/1869 indicated, to persuade the producers concerned that these devices are not necessary to market gas at profitable terms inside the European Union. 991 See Commission press release IP/03/1345 of 6.10.2003 – Gazprom/ENI. 992 Commission decision of 24.5.2018, Case 39.816 – Upstream Gas Supplies in Central and Eastern Europe. 993 See section 3.2. below.

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nation clauses – the expansion clauses reduced or even eliminated the customer’s economic incentive to export gas purchased from Gazprom. The customer was unable to meet its take-or-pay obligations by selling outside the designated territory. It might be argued that the customer would still have an incentive to do so if there was unmet demand in another territory. However, by linking takeor-pay volumes to a particular territory the clause was not in line with the EU’s objective of creating an integrated energy market with free flow of gas.

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The series of proceedings relating to the destination clause is an illustration of how competition policy complements internal market policy. Without removing all major obstacles to cross-border gas competition, the creation of the internal energy market cannot be completed. Destination clauses interfere with the free flow of energy within the EU.

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The Commission investigation into these cases concerned two contracts concluded by GDF in 1997, one with the gas importer ENI and the other with the electricity generator ENEL. The former contract related to the transportation of natural gas purchased by ENI in northern Europe. GDF transported the gas on behalf of ENI from the north-western border of France across the country to the border with Switzerland. The contract provided that the objective of the contract was transit and therefore the gas in question was intended to be sold downstream from the delivery point (i.e. in Italy). The other contract with ENEL concerned the swap of liquefied natural gas purchased by ENEL in Nigeria. This contract stated that, “GDF’s natural gas volumes … are … offtaken by ENEL … . ENEL … is in charge of transporting them to ENEL power plants in Italy”. In other words, it required ENEL to use the gas only in Italy.

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The Commission concluded that the two clauses restricted the territory in which ENI and ENEL could resell or use the gas and were designed to partition national markets by preventing consumers of natural gas established in France from obtaining supplies from these competitors of GDF. They therefore constituted a hard-core restriction of competition. The Commission found in a formal decision that the territorial sales restrictions infringed Article 101(1). Although the two territorial sales restrictions had been removed in the meantime, a formal decision was considered to be necessary in order to clarify the law for the benefit not only of the parties but of all the other firms operating in the sector. In view of the fact that the liberalisation process has involved a profound change in the commercial practices of energy suppliers the Commission did not impose fines. 260

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It announced, however, that it will show much less clemency should it find restrictions of the same type in other gas contracts.994

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In Upstream Gas Supplies in Central and Eastern Europe the Commission took action against the long-term gas supply contracts that Gazprom had concluded with importers in eight Central and Eastern European Member States.995 The contracts which were concluded before these countries joined the EU, contained clauses that prevented the importers from re-selling the gas outside their country (re-export bans or re-sale restrictions) as well as destination clauses that obliged the importers to use the gas only in their own country. The Commission explained that clauses requiring a buyer to sell goods only outside a given territory or outside a Member State (that is to say, an ‘obligation to export’) has as its object the partitioning of markets along national lines by protecting that territory from the competition that would result from that buyer’s sales into the territory or from resales into the territory by third parties re-importing the goods996. Similarly, according to the Commission clauses prohibiting exports (namely, an obligation to sell on the domestic market), by their very nature, constitute a restriction on competition because it is designed to prevent a buyer from exporting goods to other Member States and therefor is liable to partition markets within the Union, contrary to Article 101 of TFEU.997

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3.2 Indirect market partitioning by territory Territorial sales restrictions may also result from indirect measures taken by energy suppliers. Indirect measures are typically designed such that they induce customers not to enter the market of the supplier or the other distributors and/ or only to commercialise the purchased good in their “traditional” market or the territory allocated to them. This latter objective can be pursued in a variety of ways, for example through the reduction of discounts or the charging of additional fees in the event of sales outside the allocated territory.998 The result may be “dual pricing”: one price for the territory in which the supplier wants its customer to market the good, another price for exports or sale in an area in which the supplier does not wish the customer to operate.999 These practices are even 994 See Commission press release IP/04/1310 of 26.10.2004 and decisions of 26.10.2004, COMP/38662 GDF/ENI and COMP/38662 – GDF/ENEL. 995 Commission decision of 24.5.2018, Case 39.816 – Upstream Gas Supplies in Central and Eastern Europe. 996 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe, para. 45. 997 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe, para. 46. 998 For a recent example see Case T-450/05, Peugeot, ECR 2009, page II-2533. 999 Dual pricing systems normally constitute a restriction by object, see Joined Cases C-501/06 P and others,

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more likely to be viewed as hard-core sales restrictions when used in conjunction with methods or systems allowing the supplier to monitor or verify the effective destination of the goods or services in question.1000 However, not every measure affecting sales outside the “traditional” market infringes the competition rules. It may for instance be justified to grant rebates to distributors when they sell inside the territory if the rebate is granted in return for special efforts to sell the product within the territory or to compensate a dealer for services rendered to a customer of another dealer.1001 In such cases the object of the measure is not to restrict parallel trade, provided that there is a reasonable relationship between the rebate and the value of the service. Before it is concluded that a restraint is a hard-core restriction, it is necessary to analyse the restraint in light of the underlying facts in order to determine its objective purpose.1002

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Profit pass-over obligations in the form of a so-called “profit-splitting mechanism” are an example of a possible indirect measure to restrict re-sale by the purchaser.1003 A profit-splitting mechanism obliges the importer to pass over to the producer a share of the profits made when reselling gas outside the “traditional” market.1004 Profit-splitting mechanisms may be applied to pipeline gas sales. They seem, however, to be particularly common with regard to liquefied natural gas (LNG) sales. LNG is transported by ships and permits greater flexibility as regards the point of delivery than pipeline gas. Moreover, it is easy to monitor the destination of the cargo. For pipeline gas it is often impossible to monitor the final destination once the gas has been delivered.

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Sometimes a profit-splitting mechanism may have the same object as a destination clause. This may be clear from the detailed rules that govern its application, for instance because all incremental profits accrue to the seller and therefore eliminate the buyer’s incentive to change the destination. In such cases the profit-splitting mechanism would constitute a hard-core restriction. In other situations, however, profit pass-over obligations require a more detailed analysis.1005

GlaxoSmithKline, ECR 2009, p. I-9291. 1000 See Vertical restraints guidelines paragraph 50, Appendix 4. 1001 See implicitly Case T-450/05, Peugeot, ECR 2009, page II-2533, as well as Case T-67/01, JCB, ECR 2004, p. II-49, and Commission Decision of 15.05.1991, IV/32186 – Gosme/Martell, paragraph 34. 1002 See Commission Guidelines on the application of Article 101(3), OJ 2004 C101/ 97 of 27.04.2004, paragraph 22. 1003 See Vertical restraints guidelines, paragraph 50, Appendix 4, which mentions profit pass-over obligations as an example of indirect measures to restrict sales by the buyer. 1004 See Commission Competition Report 2002, p. 208; IP/02/1869 of 12.12.2002 – NLNG. 1005 See also H. Nyssens, I. Osborne, Profit splitting in a liberalised gas market: the devil lies in the detail, Competition Newsletter 2005

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Profit-splitting mechanisms take two basic forms. The parties either agree to split the entire difference between the lower price usually obtained in the home market of the importer and the higher price actually obtained from a buyer in another market (“price-splitting”). Or, alternatively, the parties agree to split the incremental profit obtained from the sale in the other market after deducting all costs incurred with the marketing and delivery of the gas in that market (“profitsplitting”). Only in the latter case the importer can be sure to retain part of the profits resulting from arbitrage, assuming that there are no hidden costs which are not taken into account.

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The first method (“price-splitting”), which only splits prices and not profits, does not ensure that the importer benefits from cross-border sales. Depending on the costs, it may even incur a lower profit than from sales in its traditional sales area. Price-splitting is thus very likely to have a stronger adverse effect on incentives to engage in parallel trade than the second method. The second method (“profit-splitting”) in principle preserves the incentives to engage in parallel trade because splitting takes only place as long as an incremental profit is made. However, this conclusion presupposes that all costs are taken into account and are accurately calculated. If not, parallel trade will be discouraged. Given this risk, the Commission is likely to be sceptical of profit-splitting mechanisms. In Upstream gas supplies in Central and Eastern Europe Gazprom committed to no longer apply profit-splitting mechanisms.1006 Similarly, under the settlement concluded between the Commission and Sonatrach, Sonatrach committed to abstain from including any profit-splitting mechanisms in LNG and pipeline contracts that apply after title and risk have passed to the buyer.1007 Prior to reaching this settlement the parties apparently engaged in protracted negotiations to find a formula that would satisfy the Commission that the incentive for buyers to engage in arbitrage was preserved. In the end a clear-cut but more crude solution was found, namely to ban such mechanisms all together when title and risk have passed to the buyer.1008 This means that under the settlement the delivery clause contained in the agreement plays an important role in the assessment.1009 If the parties conclude a FOB (free on board) or a CIF (cost in-

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1006 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe, para. 166. 1007 See press release IP/07/1074 of 11.07.2007. 1008 The settlement would not seem to imply that all profit sharing mechanisms are considered contrary to Article 101(1). The fact that the clauses proposed by Sonatrach did not pass muster does not exclude that there may be other clauses that are compatible with Article 101(1) because they are drafted and applied in such a way that they do not create disincentives for the buyer to engage in arbitrage. 1009 The Commission may be revisiting this approach based on the passing of title and risk in its pending investigation of Qatar Petroleum. The Commission’s press release provides that “certain clauses contained in these agreements appear to, directly or indirectly, restrict the EEA importers’ freedom to sell the LNG in alterna-

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surance freight) delivery occurs in the port of departure in which case a priceor profit-splitting mechanism may be caught by Article 101(1). If the parties conclude a DES (delivery ex ship) contract, delivery takes place at the port of destination in which case a price- or profit-splitting mechanism does not constitute a resale restriction.

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The second consideration to be taken into account concerns the fact that the seller would arguably interfere with the buyer’s business when introducing a profit-splitting mechanism into a supply contract. It presupposes that the buyer communicates the selling price to the supplier, who may be an actual or potential competitor of the buyer for such sales. However, it may be possibly to address these concerns by involving an independent third party in the process thereby avoiding that sensitive information be exchanged between the parties.

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It follows that the Commission is sceptical of profit-splitting mechanisms and that it may often consider that they have as their object the restriction of competition within the meaning of Article 101(1).1010 It is important to note, however, that this severe treatment of resale restrictions only applies to intra-EU sales. Restrictions on resale between a third country and the EU are only caught by Article 101(1) when they have appreciable restrictive effects on competition inside the European Union.1011

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Vertical supply agreements may also contain delivery clauses that stipulate that the energy, for instance gas, is delivered at a certain location such as the customer’s production site. Once the gas is delivered it may be difficult to reverse the flow and resell the gas to a third party. That raises the question whether such delivery points and refusals to agree on alternative delivery points may be challenged under Article 101 as being an indirect resale restriction. It is submitted that this is not the case. The agreement does not impose on or incentivise the buyer not to resell the products. It may be that reselling is difficult, but this is a consequence on the unilateral conduct engaged in by the seller and its refusal to engage in alternative conduct. Since the implementation of this conduct requires no participation by the other party, no agreement within the meaning of Article tive destinations within the EEA. For example, some contractual clauses prevent any diversion of cargoes to another destination or restrict the territories to which diversion can take place or the volumes that can be diverted. As a result, these clauses may unduly limit the free flow of LNG sold by Qatar Petroleum in the EEA, segmenting the EU’s internal gas market.” Since LNG contracts commonly provide that title and risk pass upon delivery at the port of destination, the Commission will need to consider the implications of the Sonatrach settlement on its analysis under EU competition law. 1010 See Vertical restraints guidelines, paragraph 50, Appendix 4. 1011 See Case C-306/96, Javico, ECR 1998, p. I-1983.

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101 arises.1012 However, such conduct may be caught by Article 102 if the aim is to restrict exports.1013 In Long-term contracts France a dominant generator offered commitments whereby the customer would be entitled to reroute electricity to one or more other power withdrawal points.1014 This obligation made resale possible. Similarly, in Upstream gas supplies in Central and Eastern Europe the Commission intervened against Gazprom’s refusal to change gas delivery points or the location where the gas was metered.1015 By making clear that the infringement related to a refusal to change delivery and metering points the Commission signals that the conduct engaged in by Gazprom was unilateral in nature.

3.3 Customer and use restrictions Vertical agreements may also impose restrictions on the customers to whom the energy products may be resold. It may for instance be provided that the products may only be resold to a particular predefined class of customers such as power generators or industrial end-users as opposed to household customers. Like for territorial restrictions, customer restrictions may flow from direct and indirect restraints. As already mentioned profit pass-over mechanisms are likely to belong to the latter category.

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In one case the importer was contractually obliged to share any additional revenue with the producer when the gas was resold to a customer using the gas for a different purpose than originally agreed upon. DONG, the Danish gas wholesaler, was buying gas from a Danish group of producers. The wholesaler had to report to the producers the volumes sold to certain defined classes of customers in order to benefit from special price formulae. The Commission concluded that the pricing method and the reporting obligations effectively amounted to a ‘use restriction’, as DONG could not sell the gas to whichever customer it wished without losing the benefit of the specific price formula. Such restrictions imposed a resale restriction on the buyer contrary to Article 101(1). The Commission proceedings were closed after the parties committed to deleting the clause from their contracts.1016

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1012 See in this respect Joined cases C-2/01 P and C-3/01 P, Bundesverband der Arzneimittel-Importeure, ECR 2004, p. I-23. It is a condition that de facto there is no agreement between the parties to restrict parallel trade. 1013 See in this respect Joined cases C-468/06 to C-478/06, Sot. Lélos kai Sia, ECR 2008, p. I-7139. 1014 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 93. The commitments also contained an obligation to take all volumes purchased into account for the purposes of calculating discounts. 1015 See Commission Decision of 24.5.2018 in Case COMP/.39816 – Upstream gas supplies in Central and Eastern Europe. 1016 See Commission Competition report 2003, paragraph 144; press release IP/03/566 of 24.04.2003; D.

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3.290

These restrictions were also an issue in the Distrigas case.1017 The long-term supply contracts concluded with industrial users originally contained clauses whereby the buyers committed to use the gas as a input for their purposes and not resell it. Such obligations are often referred to as captive use restrictions. As a result of the Commission’s intervention Distrigas committed to remove these restrictions from the agreements and to refrain from concluding new contracts containing such restrictions. In the Long-term contracts France case the dominant firm made commitments to remove resale restrictions from its contracts, to refrain from introducing such restrictions in new contracts and to facilitate the resale of electricity by its customers by allowing them to choose alternative delivery points.1018 The Commission thus treats in the same way resale restrictions imposed on buyers that have reselling as their main business and buyers that mainly use the product as an input. It is submitted that there is less reason to intervene against resale restrictions in the latter context. While reselling by industrial users may have beneficial effects such as increased wholesale market liquidity,1019 the link with the policy objective of the EU to create an internal energy market is less obvious. There is a significant difference between imposing a resale restriction on a gas importer or distributor and an industrial user, who does not function as an intermediary in the market. Moreover, resale restrictions may allow in particular energy intensive users to obtain prices that enable them to remain competitive. Therefore, treating captive use restrictions as hard-core resale restrictions does not seem warranted. It is submitted that such restrictions should be treated in the same way as non-compete obligations and thus be prohibited only when they are likely to have adverse effects on competition.

4. 3.291

Exclusive energy distribution agreements

Energy may be distributed to industrial, commercial and household consumers by way of intermediaries acting as exclusive dealers or distributors for a producer, generator, wholesaler or importer. Exclusivity implies that a supplier sells its products only to one dealer or distributor for resale in a particular territory. Thus, the supplier refrains from selling to other distributors or directly to cusSchnichels/F. Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DUC/DONG case in: Competition Newsletter 2003 (2) p. 60 seq. 1017 See Commission Decision of 11.10.2007, Case COMP//37966 – Distrigas, paragraph 17. 1018 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 93. According to the Commission the commitment to facilitate resale was required to remedy the effects of restricting resale. The Commission has the power to impose remedies to eliminate the continuing effects of past infringements, see e.g. Case C-62/86, AKZO, ECR 1991, p. 3359, paragraph 155. 1019 See Commission Decision of 17.3.2010, Case COMP/39.386 – Long-term contracts France, paragraph 38.

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tomers within a given territory. The territory usually encompasses a town, a region or a whole Member State. Moreover, exclusivity generally also implies that the supplier protects the distributor against “active selling” by other appointed intermediaries in other areas into the allotted territory.1020 Exclusivity as defined is covered by the vertical restraints block exemption.1021 Instead of allocating a particular territory, a supplier can also attribute a particular class of customers to a distributor. Since the competition analysis of exclusive customer allocation is comparable to that of allocating exclusive territories,1022 this issue is not treated separately here. In considering exclusive distribution agreements, it is important to determine from the outset whether the parties are competitors or not. The exclusivity arrangements raise different competition issues and lead to different outcomes depending on whether they are of a horizontal or vertical nature. Exclusive distribution arrangements between competitors are normally more harmful to competition than those between non-competitors and are therefore more likely to be incompatible with competition law. The discussion in this section deals only with distribution agreements concluded between non-competitors.1023

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Gas and electricity intermediaries holding an exclusive distribution right are regularly also the owners of the downstream network. Distributors have traditionally carried out two functions – energy sales as well as the operation of the distribution network. Thus, a distributor, when it purchases electricity or gas for resale, may conclude an exclusive distribution agreement with its supplier, corresponding to the territory for which it is the operator of the distribution network. Furthermore, the grant of an exclusive distributorship may be the counterpart to a non-compete clause obliging the re-seller to procure all electricity and gas requirements from the supplier.

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Exclusive distribution arrangements are normally explicitly agreed between the parties in order to clearly delineate the boundaries of the reserved territory. Exclusivity may, however, also result from indirect obligations or a concerted practice between the parties. Evidence of a concerted practice could, for instance, be the systematic refusal of a supplier to enter into negotiations for sales, instead referring interested customers to the distributor active in the area. An example of an indirect obligation protecting a distributor against competition is the

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1020 1021 1022 1023

See Vertical restraints guidelines, paragraphs 51, 151, Appendix 4. See Article 4(b) Vertical block exemption Regulation. See Vertical restraints guidelines, paragraphs 168 seq, Appendix 4. For distribution agreements concluded between competitors see above, book paragraphs 3.104 et seq.

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contractual stipulation that the supplier has to obtain the distributor’s consent before selling to rivals or customers of the distributor situated in his traditional sales territory.1024 Other examples are a “right of first refusal” for the reseller to be the first potential buyer of the goods of the supplier due for its sales area1025 and, possibly, “most favoured customer” provisions entitling the buyer to claim identical terms to any other importer who would have received better commercial terms than itself.1026

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Arrangements called “necessary adjustment mechanisms”, “reduction clauses” or “parallel sales clauses” may also give rise to de facto exclusivity. Such provisions are regularly found in long-term gas supply contracts, not only between gas producers and importers, but also between downstream importers and distributors. The mechanism or clause entitles the buying party to reduce volumes bought from the supplier should the latter start to market its gas in the sales area of the reseller.1027 The right to reduce contract volumes may de facto have an effect similar to an exclusive distribution right and effectively hinder the gas supplier from entering the downstream market of the importer or wholesaler.1028 The concrete circumstances of the individual case determine to which extent this is true. An important element of the analysis is whether the supplier has in view of the possible loss of volumes already “sold” to the reseller any real economic incentive to engage in additional sales. Presumably, this is only the case if the supplier can sell additional volumes, or if it could obtain higher margins for all volumes sold including those already contracted to the reseller.1029

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It has been argued that a gas reseller’s right to reduce its contract volume in the event that the supplier sells in “its” territory does not infringe competition law irrespective of its market impact, because it is a necessary counterpart to the take-or-pay obligation which is usually inserted in these gas supply contracts. A take-or-pay-provision obliges the buyer to pay for a defined quantity of gas even if it is not taken.1030 The reduction right is claimed to be objectively justified because the supplier could otherwise sell its gas twice, namely to the buyer 1024 1025 1026 1027

See Commission press release IP/03/1345 of 6.10.2003 – Gazprom/ENI. See Commission press release IP/05/195 of 17.02.2005 – Gazprom/OMV. See Commission press release IP/05/710 of 10.6.2005 – Gazprom/E.ON Ruhrgas. See Competition Report 2003, 33 146 seq., Commission press release IP/03/566 of 24.04.2003 – DONG/ DUC case; Competition Report 2002 p. 196 – Wingas/EDF Trading. 1028 Selling restrictions on the seller are not hard-core restrictions under Article 4(b) Vertical block exemption Regulation. Reduction clauses are therefore treated differently than expansion clauses, see section 3.1 above. 1029 See Commission Decision of 29.09.1999, IV/M.1383 – Exxon/Mobil, OJ L103/1 of 7.04.2004, paragraph 91. 1030 See footnote 1 of D. Schnichels/F. Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DONG/DUC case, Competition Newsletter 2003 (2).

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and to actual or potential customers of the buyer. It is submitted, however, that this reasoning is only correct in some circumstances. This might for instance be the case where the buyer is the only re-seller in a geographically closed or isolated market1031 and where it procures gas exclusively from a single supplier. When resale into neighbouring territories is restricted due to obligations not to sell actively into the exclusive territories of other distributors the argument may also have some force, provided that the bans on active selling are compatible with Article 101. Where, however, the reseller obtains its requirements from several suppliers, and might sell the gas it purchases to customers of competing re-sellers or into new geographical markets, it is not necessary to shield it against direct sales by the supplier since it is just one of several sources of competition in a given market that a re-seller will face.

4.1 Competition issues of exclusive energy distribution agreements The allocation of an exclusive territory leads (indirectly) to market sharing between distributors of the same brand and thus to a restriction of intra-brand competition between them. Due to the existence of the contract they are legally obliged not to compete with one another regarding the goods in question. The impact on competition depends mainly on two factors; namely the number of appointed resellers of the same brand and whether appointed resellers involve non-appointed resellers in the sale of the product.1032 When the supplier appoints only one distributor for each relevant geographic market and the appointed distributors do not involve other, non-appointed resellers in the sale of the product or brand in question, there will be only a single distributor selling the product of the supplier in every geographic market, which severely restrict intra-brand competition.

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For consumers, exclusive distribution agreements diminish the choice between resellers of the same product or brand and, possibly, the choice of marketing methods. Moreover, depending on the circumstances, exclusive distribution agreements may allow the supplier and the appointed resellers to charge consumers different prices in the different sales territories and as a result engage in price discrimination.1033

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1031 See the definition of isolated markets in Article 49 Gas Liberalisation Directive 2009. 1032 See Vertical restraints guidelines, paragraph 156, Appendix 4. 1033 See Vertical restraints guidelines, paragraph 151, Appendix 4.

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3.299

The establishment of an exclusive distribution system for the sale of a product normally has only a negative effect on “ intra-brand competition” between the sellers of the same product. However, by making distribution more effective (for example, by enabling the appointed distributor to focus its efforts on selling the contracted product), it may also increase “inter-brand competition”. Exclusive distribution is therefore mainly a concern when inter-brand competition is limited or when very far-reaching forms of territorial or customer restrictions are imposed. Competition concerns are particularly likely to arise when: –

the appointing supplier grants its distributors “absolute protection” against intra-brand competition from other appointed distributors,1034

–

the establishment of an exclusive distribution system has the effect of foreclosing access to energy supplies, by competitors of the appointed distributor (“ foreclosure”), or

–

the existence of parallel exclusive distribution systems causes, or strengthens, collusion amongst energy suppliers and/or distributors.1035

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Given that Community law treats the grant of absolute territorial protection as a hard-core restriction, this competition issue will be addressed first.

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To grant absolute protection means that the supplier bans “active sales” as well as “passive sales” by appointed distributors into the territory, or to customers reserved for other appointed resellers. The prohibition of “passive sales” constitutes a hard-core restraint also in exclusive distribution agreements. A distributor must be permitted to respond to unsolicited requests from individual customers established in another distributor’s territory, including the delivery of goods to such customers.1036 It would otherwise be possible for suppliers to compartmentalise the European Union into separate national markets through exclusive distribution systems. To prohibit passive selling would imply that exclusive distributors could never sell to customers located in territories of other exclusive distributors located in other Member States. The objective of the TFEU to create and protect an area without internal frontiers could in this way be thwarted by vertical restraints agreed between energy companies. 1034 See Vertical restraints guidelines, paragraph 50, Appendix 4. 1035 See Vertical restraints guidelines, paragraphs 151, 156, Appendix 4. 1036 See Vertical restraints guidelines, paragraph 51, Appendix 4.

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However, in order not to forego the potential efficiency benefits of exclusive distribution agreements, EU competition law permits in many cases restrictions on active selling. Such restrictions are permitted as long as any appreciable negative effects are outweighed by efficiency gains. Under the Vertical Restraints block exemption active sales restrictions are presumed to be pro-competitive below the market share threshold of 30%.1037 A supplier can thus often oblige distributors not to actively approach individual customers inside another distributor’s exclusive territory by, say, direct mail, visits, specifically targeted promotion or the establishment of a distribution outlet in another distributor’s exclusive territory.1038 The principle is therefore that active selling may be prohibited by the energy supplier, while passive selling may not. This principle applies, however, with further qualifications. This is true for both active and passive selling.

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Passive selling does not always constitute a hard-core restriction. There exist a limited number of exceptions.1039 Firstly, vertical restraints linked to opening up new product or geographic markets in general do not restrict competition. This rule holds, irrespective of the market share of the supplier, for two years after the first putting on the market of the product and applies in the case of a new geographic market to restrictions on active and passive sales imposed on the direct buyer.1040 This rule reflects the fact that intra-brand restraints may not be caught by Article 101(1) when the restraint is objectively necessary for the existence of an agreement of that type or that nature.1041 If absent a restraint the agreement would not have been concluded, there is no intra-brand competition to be restricted and Article 101(1) does not apply.

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A further exception relates to the prohibition on a wholesaler from engaging in passive sales to end-users.1042 A supplier commercialising its energy products through distributors may contractually prohibit its wholesalers from selling energy directly to end-users. It may again do so as long as the contractual prohibition does not lead to an appreciable restriction of competition, which is not outweighed by countervailing benefits and therefore prohibited by Article 101. It is submitted that this is normally the case.1043 It is difficult to maintain a distribution system in which wholesalers that necessarily have different cost structures compete directly with retailers.

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1037 Article 4(b) Vertical block exemption Regulation. 1038 See Vertical restraints guidelines, paragraph 51, Appendix 4. 1039 See Article 4(b) Vertical block exemption Regulation and paragraph 61 of the Commission’s Vertical restraints guidelines, Appendix 4. 1040 See Vertical restraints guidelines, paragraph 61, Appendix 4 1041 See in this respect Case 56/65, Société Technique Minière, ECR 1966, p. 337, and Case 258/78, Nungesser, ECR 1982, p. 2015, and Commission Guidelines on the application of Article 101(3), paragraph 18(b). 1042 See Article 4(b)(ii) Vertical block exemption Regulation. 1043 See Case 26/76, Metro(I), ECR 1977, p. 1975.

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3.305

As already stated, the prohibition of active selling may be compatible with EU competition law. This does not imply, however, that energy suppliers may require their distributors to pass on the prohibition to their customers.1044 Indeed, such an obligation is a hard-core restriction of competition. Customers of exclusive distributors must be free to re-sell the acquired good to whomever and wherever they wish, including purchasers located in other Member States. Customers of exclusive distributors may therefore engage in arbitrage across borders, should price differences between Member States make it attractive.

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The requirement that resale restrictions are not passed on to the next level of the vertical chain does not however prevent the appointed exclusive distributors from establishing within its exclusive territory their own distribution system within which active selling is prohibited. Thus, at the end of the day the only customer of an exclusive distributor, which may be entirely free to engage in arbitrage between different exclusive territories, is the final commercial and industrial consumer. Resale restrictions at the level of such users remain hardcore restrictions.1045

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Exclusive distribution agreements may in principle also give rise to foreclosure concerns. Exclusive distribution prevents competing resellers at least temporarily from distributing its goods. However, as long as competition between distributors each representing a different brand (inter-brand competition) is vigorous and effective, the dampening of intra-brand competition among distributors of the same brand through exclusive distribution agreements is not an issue for competition policy. Where, however, inter-brand competition at the distributor’s level is restricted and other resellers find it difficult to profitably enter the market and expand, Article 101(1) may in principle apply to the exclusivity covenants. However, in assessing the consequences thereof it needs to be taken into account that it is a general principle of competition law that a supplier is normally entitled to determine with whom to deal. The fact that a supplier chooses to deal with some distributors and not with others does not in itself give rise to competition concerns. The prohibition of exclusivity does not imply that the supplier is obliged to serve other distributors. It merely means that it is free to do so. Moreover, the risk of anti-competitive foreclosure stemming from exclusivity on the seller is considerably less than non-compete obligations imposed on the buyer. When buyers are tied, it may be difficult for competing suppliers to enter the

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1044 See Article 4(b)(i) Vertical block exemption Regulation. 1045 See Article 4(b) Vertical block exemption Regulation and Commission Decision of 11.10.2007, Case COMP/37.966 – Distrigas, paragraph 17.

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market in which case inter-brand competition is restricted. When re-sellers are granted exclusivity, other re-sellers are excluded from selling the brand in question, which may affect intra-brand competition, but as resellers are free to sell competing brands inter-brand competition is unlikely to be affected. Competition concerns are only likely to arise when upstream supply sources are scarce. Exclusivity is only likely to be caught by Article 101(1) due to foreclosure concerns when three conditions are met:

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First, the buyer must have substantial market power (dominance) and therefore the ability to use exclusivity obligations to exclude competition at the distribution level.1046

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Secondly, competing resellers will only be foreclosed if a substantial part of total supply to the market is covered by exclusivity obligations. The condition is likely to be satisfied when all leading suppliers sell their energy through exclusive distributors. It is also possible that all or the most important suppliers have appointed the same dominant reseller as exclusive distributor in the geographic market (“multiple exclusive dealership”). Finally, it may be that there is only one dominant or quasi-dominant supplier active on the upstream supply market distributing its products through a reseller with market power on the downstream market.

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Thirdly, exclusive distribution agreements will not appreciably foreclose rivals unless they have certain duration. Short-term exclusive dealing will in general not harm competition.

3.312

In addition to the issues of absolute territorial protection and foreclosure, exclusive distribution agreements may finally facilitate collusion at either supplier or distributor level or both. In markets with only few leading resellers the parallel imposition of exclusive distribution rights on suppliers may have the effect of facilitating the collective exercise of market power.1047 The introduction of exclusive distribution agreements may also facilitate collusion at the supplier level, for example, if in a concentrated market each oligopolistic company appoints

3.313

1046 A stricter standard may apply in cases where suppliers create a production joint venture and jointly agree to supply their output to the same exclusive distributor, see Case T-112/99, Métropole télévision (M6), ECR 2001, p. II-2459, paragraphs 55 et seq. It is submitted however that the analysis of foreclosure in this case did not sufficiently take into account the fact that the real cause of market foreclosure was contracts concluded by a dominant incumbent. It is far from clear that the exclusivity agreement concluded by the joint venture, a new entrant, had any appreciable foreclosure effects. 1047 See Vertical restraints guidelines, paragraph 157, Appendix 4.

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the same reseller as its exclusive distributor. The higher the cumulative market share of the brands distributed by the multiple distributors, the greater the risk of collusion.1048

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Of the three competition issues raised by exclusive distribution agreements, the most important is the grant of absolute territorial protection, which is caught by Article 101(1) without any need for an analysis of its market effects, because it constitutes a hard-core vertical restraint. Moreover, as for all other hard-core restraints, the application of the efficiency defence is unlikely to be successful. The application of Article 101(3) is not excluded, but there is a presumption that the conditions are unlikely to be satisfied.1049 For the two other competition concerns, i.e. foreclosure and collusion, a full analysis of the competition effects is required. If there are indications that the agreement may be caught by Article 101(1), it should be examined whether the safe harbour of the Vertical restraints block exemption Regulation applies.

4.2 Safe harbour: Vertical block exemption Regulation 3.315

The general safe harbour for all non-hard-core vertical restraints also applies to exclusive distribution agreements. All exclusive distribution agreements concluded by an energy supplier and an energy buyer with market shares not exceeding 30% are thus presumed to be legal under the EU competition rules.1050 Since the safe harbour applies to exclusive distribution and non-compete obligations alike, the rules for the identification of the relevant market as well as for the calculation of the market share are the same. The relevant market shares are seller’s shares on the markets on which he sells the contract products and buyer’s shares on the markets on which he buys the contract products. Hence, unlike under the previous block exemption regulation, the safe harbour does not apply if the buyer’s market share exceeds 30%.

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The block exemption covers all vertical restraints necessary to grant an exclusive territory to a distributor. This includes the prohibition of active selling by a vendor into the territory. In contrast, as mentioned above, it neither includes the prohibition of passive selling nor other hard-core restrictions that are “black1048 See Vertical restraints guidelines, paragraph 154, Appendix 4. 1049 See Vertical restraints guidelines, paragraph 47, Appendix 4. The language used in paragraph 47 of the 2010 Vertical restraints guidelines is slightly more permissive than that used in the corresponding paragraph 46 of the 1999 Vertical restraints guidelines. 1050 Certain “grace periods” exist as in the case of non-compete obligations, see Article 7(d) and (e), to the effect that a safe harbour still applies for 2 years following the year the supplier’s market share rise above 30% but does not exceed 35% and for 1 year if it rises above 35%.

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listed” in the Vertical block exemption Regulation.1051 Moreover, the safe harbour does not cover horizontal restrictions should the supplier and the distributor be actual or potential competitors for the supply of energy to the reserved territory or class of customers unless the exceptions created for the “small buyer” and “ dual distribution groups” apply.1052 If the supplier makes the grant of an exclusive distribution right conditional on the acceptance of a non-compete obligation by the reseller, the safe harbour applies to both vertical restraints. However, the duration limit of 5 years for the non-compete obligation has to be respected. A duration of more than five years falls outside the safe harbour and may be caught by Article 101(1).

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4.3 Analysis outside the safe harbour The analysis of an exclusive distribution agreement in individual cases would primarily have to address the two main competition concerns, namely foreclosure (limiting competition on the relevant market between the distributor and other re-sellers that would wish to act as a distributor for the products of the supplier) and collusion. Only the former issue has arisen so far in energy cases dealt with by the Commission.

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These cases concern contracts between gas producers and importers or wholesalers. Provisions were included in the purchase agreements in question providing for a “right of first refusal” or an “adjustment mechanism” causing competition effects similar to an exclusive distribution agreement. In other words, the distributor had a right of first refusal to purchase any additional volumes the gas producer might be considering selling into the territory in question. The importers or wholesalers (i.e. the national gas companies) held strong, if not dominant positions on the relevant market as gas resellers in their traditional sales territories. However, neither the share of total gas sales marketed in these territories covered by exclusive rights nor the duration of the contracts emerge from the published case reports. However, presumably the duration was very long, as at the time this was normal in gas supply contracts with producers from third countries and Member States alike. The Commission considered in each case that foreclosure would disadvantage actual as well as potential competitors of the importer or wholesaler: other potential entrants into the market would be unable to buy gas from the upstream producers in question for resale on the

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1051 See the “black list” in Article 4 Vertical block exemption Regulation. 1052 See above, book paragraph 3.105 et seq. for the treatment of unilateral distribution agreements between competitors.

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relevant market in competition with the incumbent. Each of the reported cases was informally settled after the beneficiaries of the exclusive right had committed to the Commission to waive the “right of first refusal” or “adjustment mechanism”.1053

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A full competition analysis would also have to deal with other possible restrictions of competition contained in or caused by an exclusive distribution agreement. Two other possible restrictions would seem to be particularly pertinent in this context. One is of a vertical and the other is of a horizontal nature. A restriction of a vertical nature may occur when the grant of an exclusive distribution right to the reseller is combined with a non-compete obligation in favour of the supplier. This combination may lead to double foreclosure, namely foreclosure of competing resellers and competing energy suppliers. Exclusive distribution tends to reduce the number of distributors commercialising a particular product and, as a result excludes competing resellers from the retail markets. Non-compete obligations affect the opposite side of the same market and may exclude competing suppliers from access to resellers. Each of the exclusivity obligations may therefore create or increase barriers to entry. When market power exists on both sides of the purchasing market, the exclusivity obligations may aggravate the restriction of competition already caused by the other vertical restraint. A further restriction which may flow from exclusive distribution agreements is a horizontal restriction of competition. If absent the agreement the supplier and the exclusive distributor were actual or potential competitors in the territory reserved for the appointed distributor the agreement must be assessed according to the standards set out in chapter 2 on horizontal agreements.

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The Wingas/EDFT case is an example of a case raising vertical as well as horizontal competition concerns. EDFT is a gas trader, Wingas a wholesaler in Germany. Wingas and EDFT were parties to a long-term gas supply contract, which allowed Wingas to reduce the volumes bought from EDFT in the event that the latter were to sell gas into Wingas’ main supply territory. The mechanism would not apply to sales of EDFT to incumbent German operators such as Ruhrgas operating in Wingas’ supply area, although it did apply if EDFT wished to sell to new market participants in the German market. The Commission does not explain in its published case report whether it identified foreclosure concerns 1053 See Commission Competition Report 2003, p. 146 et seq., Commission press releases IP/03/566 of 24.04.2003 – DONG/DUC; IP/03/1345 of 6.10.2003 – Gazprom/ENI and IP/05/195 of 17.02.2005 Gazprom/OMV and IP/05/710 of 10.06.2005 – Gazprom/E.ON Rurhgas.

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(the agreement may have increased entry barriers to new market entrants in Wingas’ supply market) as a consequence of the reduction clause in view of the high concentration on the purchasing side of the German gas wholesale market and the wide-spread contractual practice to grant wholesalers reduction rights.1054 Although Wingas is not one of the largest German gas companies, its market share might be sufficient to significantly contribute to foreclosure1055. The Commission may alternatively have regarded the limitation of the scope of the reduction clause as a horizontal restriction of competition because Wingas and EDFT are presumably at least potential competitors for the sale of gas to traders or to very large industrial customers in the liberalised gas markets. Such customers have the size and resources to purchase directly from traders and wholesalers. In any event, the case was closed after a modification of the reduction clause to the effect that EDFT was free to sell to all wholesalers in Wingas’ main supply territory in Germany.1056

4.4 Efficiency defences – Art. 101(3) TFEU The principal efficiency defences for exclusive distribution agreements will in most cases be the same as or similar to those that can be invoked for non-compete obligations.1057 These defences will therefore only be re-examined in the following section insofar as it is necessary to outline the typical differences between non-compete obligations and exclusive distribution agreements. •

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Cost efficiencies

The concentration of the resale of products in the hands of a limited number of exclusive distributors may lead to efficiency gains in transportation and distribution.1058 Such claimed cost efficiencies have to be described, calculated/estimated and verifiable.1059

1054 See Commission decision of 29.09.1999, IV/M.1383-Exxon/Mobil, OJ L103/1 of 7.04.2004, paragraphs 89, 232 seq. 1055 See Commission decision of 29.09.1999, IV/M.1383-Exxon/Mobil, OJ L103/1 of 7.04.2004, paragraph 239. 1056 See Commission Competition Report 2002, p.196; press release IP/02/1293 of 12.09.2002 – Wingas/ EDFT. 1057 See above, book paragraphs 3.237 et seq. 1058 See Vertical restraints guidelines paragraphs 107(g), 164, Appendix 4. 1059 See Guidelines on the application of Article 101(3), paragraph 56.

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•

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Exclusive distribution rights may make new entry into an energy market, in particular a new geographic market, easier and therefore be a valid efficiency defence.1060 However, for such a defence to succeed, it needs to concern a contract where the supplier will be a market entrant and where the distributor will have to make promotions or other investments on which other distributors would free ride. Such a case is likely to be rare in the electricity and gas sectors. •

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Loan agreements

An exclusive distributor may wish to secure a loan that it agrees to grant to the supplier through an exclusive distribution right. This is probably a rare occurrence. If it does occur, the same conditions have to be satisfied as outlined for loans given by a supplier, which are secured by a non-compete arrangement. •

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New market entry

Investment to implement an energy supply contract

The grant of an exclusive distribution right may stimulate investment by the distributor with respect to the sale of the goods or services in question. Whether the investment will be in equipment, training of personnel, advertising, or all three, depends on the product and the market. However, to qualify as an efficiency gain within the meaning of Article 101(3) the investment must either be prone to free riding (e.g. promotions), or be relationship-specific. In addition, the investment has to be as long-term as the exclusivity arrangement. Relationshipspecificity signifies that the investment must lose its commercial value should the distributor decide to switch to another supplier. Investment in equipment, e.g. in a petrol storage tank in the case of petrol retailing or in the distribution network of a vertically integrated gas reseller in an emerging market, will very often be market but not relationship-specific. Investments in the training of personnel may be relationship-specific, if the products to be marketed are new or complex, which is normally not the case for energy products. In any event, such investments can generally be recouped short-term. Investments of an exclusive distributor may thus qualify as an efficiency gain, albeit in most instances only for a short period of time. In such cases the anti-competitive effects of the exclusivity arrangement have to be carefully balanced with the countervailing economic benefits. Only in the case of high relationship-specific investments can long-term exclusive distribution agreements be justified.1061 1060 See Case T-112/99, Métropole télévision (M6), ECR 2001, p. II-2459, paragraphs 141 et seq. 1061 See Vertical restraints guidelines, paragraph 146, Appendix 4.

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• Security of energy supply Security of supply would prima facie not appear to be a valid efficiency defence for the grant of an exclusive distribution right. The dependency of the European Union on external gas sources might justify long-term purchase commitments or possibly quantity forcing. However, it is difficult to see how this could justify exclusive distribution rights. It is difficult to determine a direct causal link between the exclusive right and the enhancement of supply security, or that the vertical restraint is indispensable to improve external supply. For network industries such as electricity or gas, it might be argued that an exclusive distribution right ensures the connection of every interested consumer to the grid, even those located in remote geographic areas. The operation of an energy grid is, however, an activity distinct from energy supply. Since the electricity and gas sectors have been opened up to competition, a link between energy supply and the connection of consumers to a grid no longer exists. An exclusive right to supply electricity or gas in a certain territory can therefore not guarantee the network connection. With respect to electricity, this issue has in any event already been taken care of through the legal obligation of distribution network operators to connect all interested consumers to the grid.1062

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In conclusion, cost efficiencies, new market entry, loan agreements and investments may allow the parties to an exclusive distribution agreement to invoke the efficiency defence of Article 101(3). As in the case of non-compete obligations, the defence needs to be properly evaluated for each individual agreement. However, this defence does not offer the parties unrestricted discretion for the conclusion of distribution agreements or the organization of a whole exclusive distribution system. Whether the benefits derived from cost efficiencies and investments also outweigh additional anti-competitive effects caused, for example, by the combination of an exclusive distribution right with a non-compete obligation depends on the factual circumstances of the case. This would be all the more true for distribution agreements also restricting horizontal competition between the parties. One needs only to recall what has been stated in the beginning of this chapter, namely that horizontal restrictions are in general more harmful for competition than vertical restraints.

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The practical application of these principles is illustrated by the DONG case,1063 where the Commission found that the wholesaler and its suppliers had agreed on a so-called “adjustment mechanism” in their gas supply contracts. The Commis-

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1062 See Article 3(3) Electricity Liberalisation Directive 2009. 1063 See above, book paragraph 3.155.

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sion interpreted the mechanism as a reduction clause granting DONG the right to reduce the volumes bought from its suppliers should they start selling into the Danish market. The “adjustment mechanism” was considered to have the same effect as an exclusivity clause. It served the purpose of reserving a certain territory for the wholesaler and de facto prevented its suppliers from entering the downstream markets of their buyers or, at least, reduced their incentives to engage in direct sales on the Danish markets. The Commission rejected the argument that the dominant wholesaler DONG needed to protect its sales markets against competition from the suppliers in view of the fact that the transmission network was sufficiently interconnected with other markets in adjacent Member States. The proceeding was terminated after the Danish wholesaler had committed to waive the adjustment mechanism after a transitional period of six months when a new pipeline was expected to be commissioned which would link the Danish gas fields from where DONG obtained its gas with other continental European gas markets.1064

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For companies selling electricity and gas, capacity rights for the transmission of energy on the network are essential for the procurement as well as the supply of energy. In order to ensure that a supplier always disposes of sufficient capacity rights, it has been common even before liberalisation to conclude capacity reservation agreements for networks with their operators. Such agreements are in particular typical for the reservation of upstream pipeline capacity in the gas sector and for interconnectors linking networks of neighbouring Member States in the electricity sector. Reservation agreements ensure its beneficiary transmission capacity and exclude others from the use of that capacity. The exclusion of other suppliers is not a problem as long as sufficient transmission capacity is available for all. However, where transmission capacity becomes scarce, the exclusion of other suppliers may have an effect on competition not only on the transmission markets but also on the related energy supply markets. This is particularly relevant in the context of liberalisation where new entrants wish to enter the opened-up electricity and gas markets in order to compete with the incumbents for the benefit of the energy consumers. It is thus not surprising that the Commission has already been dealing with reservation agreements concerning the electricity grids linking the United Kingdom and France, France and Spain, the Netherlands and Germany as well as Germany and Norway via Denmark.1065 1064 See Commission Competition Report 2003 p. 209 seq.; press release IP/03/566 of 24.04.2003 – DUC/ DONG; D. Schnichels/F. Valli, Vertical and horizontal restraints in the European gas sector – lessons learnt from the DONG/DUC case, Newsletter 2003 (2), page 61 seq. 1065 See Commission Competition Report 2000 page 155 seq. – Statkraft/Elsam – interconnector capacity; Competition Report 2001 page 208 seq. – UK/France interconnector; Competition Report 2003 page 202

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Capacity reservation agreements may be caught by Article 101 EC, if they cause foreclosure effects similar to non-compete obligations or exclusive distribution agreements. If the reservations are made by a vertically integrated firm Article 101(1) is not applicable given the fact that the agreement is not concluded between undertakings. In such cases the essential facilities doctrine developed under Article 102 may be relevant.1066 Vertical integration of networks and supply gives the integrated firm the means and incentive to distort competition on supply markets in its favour. In its energy sector inquiry the Commission concluded that the requirements of legal and functional unbundling imposed by the current directives have not been sufficiently effective. Moreover, the Commission has accepted commitments whereby dominant gas incumbents undertaken to release a significant share of the entry capacity in their own pipeline systems that they had reserved for their own supply business and actually used for that purpose.1067

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Under Article 101 two scenarios would seem to be relevant for the analysis of foreclosure effects. The first scenario is where smaller actual and potential competitors cannot profitably penetrate or enter a downstream energy retail market because of reservation agreements for a bottleneck piece of network (e.g. an interconnector), that they objectively need to use for procuring supplies from an upstream wholesale energy market (e.g. in a neighbouring Member State). The competition concern is foreclosure of inter-brand competition. Secondly, where smaller suppliers or newcomers active on an upstream wholesale market are prevented from selling their energy products to retailers downstream because of reservation agreements for the only interconnector providing a transmission link between wholesalers and retailers. In this scenario the concern is also foreclosure of inter-brand competition.

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As has been discussed above, the foreclosure of rivals becomes a competition law issue if three conditions are satisfied. One or several suppliers jointly must possess some degree of market power either on the energy market downstream to the bottleneck facility or on the wholesale energy market upstream to the facility. Furthermore, the vertical arrangement, e.g. an exclusive right, has to cover a significant part of the market, here the transmission market comprising the bottleneck facility, and, finally, the vertical arrangement has to be of a sufficient duration to cause appreciable foreclosure. These three conditions are likely to

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Corus Nederland/ Pechiney Nederland. 1066 See in this respect Case C-7/97 Oscar Bronner ECR 1998, I-7791. 1067 See Commission Decisions of 3.12.2009, Case COMP/39.316 – Gaz de France, and og 4.5.2010, Case COMP/39.317 – E.ON Gas. These cases represent a far-reaching application of the essential facility doctrine since the gas undertakings concerned actually used the capacity that they committed to release.

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be satisfied in a situation where a dominant supplier active on the downstream retail market benefits from a long-term exclusive right for the use of the only interconnector(s) linking the Member State in which it is active with neighbouring Member States within the European Union. Newcomers wishing to offer their products on the downstream market are prevented from entering unless it is viable to build competing infrastructure. The outcome of the analysis is the same irrespective of whether the dominant supplier holds an express exclusive right or de facto reserved all of the marketable capacity of the bottleneck facility. A special case is the capacity reservation agreements concluded before the adoption of the Electricity and Gas Liberalisation Directives in 1996 and 1998. Do the EU competition rules apply to such agreements? The Commission appear to have been of the opinion that pre-liberalisation agreements are valid, even if they raise competition concerns.1068 This position seems to be inspired by the principles of legal certainty and legitimate expectations of the contracting parties. However, the Court of Justice rejected this argument in a preliminary ruling on the decision of the system operator of a national electricity transmission system to grant priority access to the parties of a long-term electricity import contract concluded before liberalisation. Although the Court did not have to decide on the applicability of competition law to such contracts, it certainly has opened the door for it.1069

1068 See Commission Competition Report 2003 page 202. 1069 See Case C-17/03, Vereniging voor Energie, Milieu en Water/Amsterdam Power Exchange Spotmarket/ Eneco, ECR 2005, p. I-4983.

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CHAPTER 4 Article 102 TFEU Abuse of a dominant position1070 1.

Introduction

Article 102 TFEU is a difficult provision, because it deals with firms, which individually or collectively enjoy considerable market power, or, to put it differently, because it deals with situations in which the market mechanism does not optimally work. The term used by Article 102 TFEU to indicate this degree of market power is “dominant position”, which notion has been interpreted by the Court of Justice of the European Union (both the Court of Justice and the General Court) as a situation in which a firm can determine its market conduct independently, irrespective of the attitude of its suppliers, competitors and customers, i.e. a situation in which firms do not face significant competitive constraints.1071

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Although European and national merger control rules have as their object to prevent the creation of new dominant positions, they do not necessarily catch all situations in which dominance can occur, especially not in the energy sector, where the dominant positions of many electricity and gas companies can be explained by historical reasons, such as the grant of exclusive rights to public utility companies. There is thus a need to ensure ex post control of dominant firms’ competitive behaviour.

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1070 This chapter is a revised version of the chapter written by Marc van der Woude in the third edition of this book published in 2011, and revised by the author for the period 2011-2014 in the last edition. This chapter only reflects the views of the author. 1071 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22.

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Monopolies are likely to give rise to dominant positions, but not necessarily so. Even a 100% market share does not procure market power or independence, if the firm in question acts under the constraint of immediate market entry by competing firms. However, in most cases, market entry will take time or is made difficult by barriers to entry. This leaves the firm with a high market share some time to act independently.

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Article 102 TFEU and comparable provisions under national law do not forbid dominant positions. They prohibit an abuse of such positions. The notion of abuse is a relatively woolly open-ended concept that considerably reduces the commercial freedom of dominant firms. It covers two broad categories of conduct: behaviour that purports to consolidate or enhance the dominant position and behaviour that consists of exploiting the dominant position to the detriment of suppliers and/or customers. Whereas the prohibition of the first category of so-called exclusionary practices can be justified on economic grounds, the prohibition of exploitative practices has a strong normative element: dominant firms should not “rip off ” others by charging excessively high prices or imposing inequitable terms.1072

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The study of Article 102 TFEU is further complicated by the, real or perceived, difference between the Commission’s policy and the case law of the Union Courts. Following an intensive internal debate within the Commission’s services and external consultations, the Commission decided to reorient its enforcement policy. On 24 February 2009, it published a Notice on the ‘guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’ (thereafter the “Notice”).1073 Rather than focussing on the legal form of the conduct under scrutiny, the Commission focuses on exclusionary conduct that is likely to harm consumers. Article 102 TFEU should be applied only if it can be shown that it causes or that it is likely to cause effective harm to competition. “[T]he aim of the Commission’s enforcement activity […] is to ensure that dominant undertakings do not impair effective competition by foreclosing their competitors in an anti-competitive way, thus having an adverse impact on consumer welfare, whether in the form of higher price levels than would have otherwise prevailed or in some other form such as limiting quality or reducing consumer choice’.

1072 See generally on this Akman, The Concept of Abuse in EU Competition Law: Law and Economic Approaches, (Hart Publishing, 2012). 1073 OJ 2009, C 45/8.

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Also, the Commission is reluctant to curtail the commercial freedom of dominant firms. As a rule, it will intervene only if the conduct forecloses market access by a firm that is just as efficient as the dominant undertaking.1074 Since the Notice imposes a higher standard of proof on the enforcer, these firms should logically enjoy some more commercial freedom than under the old regime. By contrast, the application of the new rules is harder to predict, because the existence or absence of exclusionary effects will depend on extensive factfinding. This could be seen as a reduction of legal certainty. The uncertain gains in terms of efficiency should therefore not be offset by the inevitable welfare loss arising from less predictability.1075 In the energy sector, a policy development which affects the interpretation of Article 102 TFEU was the publication on 10 January 2007 of the Commission’s report on the energy sector inquiry.1076 This report summarizes the findings of an industry wide study and consultation process into the functioning of gas and electricity markets. The report not only identifies structural shortcomings, such as a high degree of concentration and insufficient interconnection capacity, but also reflects the existence of possible anticompetitive practices reducing liquidity of wholesale markets or obstructing an efficient and objective use of networks. The Commission has relied upon this inventory to roll out an impressive enforcement programme that already started in 2006. The part of this enforcement action that relates to Article 102 TFEU will be discussed in this chapter.

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We can schematically see three periods in the enforcement of Article 102 TFEU in the energy sector after the Sector Inquiry. In the first phase, the Commission mainly focused on long-term supply contracts raising foreclosure effects.1077 In

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1074 This development must be analysed in the context of the modernization of the EU competition law regime, in particular with the implementation of the so-called ‘more economic’ approach. On this, see generally Ehlermann, “The Modernization of EC Antitrust Policy: a Legal and Cultural Revolution”, 37(3) Common Market Law Review (2000), 537-590 and Wesseling, The Modernization of EC Antitrust Law (Hart Publishing, 2000). On the ‘more economic’ approach, see Bishop and Ridyard, “EC Vertical Restraints Guidelines: Effects-based or Per Se Policy?”, 23(1) European Competition Law Review (2002), 35-38; Röller, “Economic Analysis and Competition Policy Enforcement in Europe” in van Bergeijk and Kloosterhuis (eds.), Modeling European Mergers. Theory, Competition Policy and Case Studies (Cheltenham: Edward, Elgar, 2005), 11-24 and Verouden, “Vertical Agreements and Article 81(1) EC: The Evolving Role of Economic Analysis”, 71(2) Antitrust Law Journal (2003), 525-576. 1075 See generally on this Hauteclocque, Market Building through Antitrust: Long-term Contract Regulation in EU Electricity Markets (Cheltenham: Edward Elgar, 2013). 1076 Note that national competition authorities have also conducted sector inquiries in energy markets. See for instance the state of the market assessment conducted in UK. 1077 Case COMP/37.966, Distrigaz, OJ 2008, C 9/8; Case COMP/39.387, Long term electricity contracts in Belgium, proceeding was closed on 28 January 2011; and Case COMP/39.386, Long term electricity

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the second phase, the Commission tackled more complex issues. Following the RWE1078 and E.ON1079 cases, enforcement was more and more concerned with issues traditionally addressed through sector-specific regulation, in particular infringements linked to national networks, cross-border infrastructure and price manipulation on wholesale and balancing markets. Not surprisingly, these complex cases resulted in regulatory-like remedies. Whereas in the RWE case the Commission was tackling under the antitrust rules a fairly straightforward case of discriminatory (or inefficient) access to the network for competitors, the Commission then went on in subsequent cases to impose on dominant companies to more effectively market test demand (ENI)1080 or even release capacity it was effectively using for itself (GDF).1081 In the Svenska Krafnät case,1082 the Commission went as far as classifying congestion shifting by the Swedish TSO as an abuse of a dominant position, and imposing market splitting in Sweden, thereby changing the whole market design. In the third phase, we see that EU enforcement has largely decreased in intensity, compensated by an increase in antitrust activity of national competition authorities. The Commission and NCAs coordinate within the European Competition Network. The Commission now tends to focus on the most complex issues, such as power exchanges and interconnectors, and on more political cases, looking eastward (see for instance the enforcement actions against Gazprom).

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As an introductory note, we can also mention that the role of the Commission in the promotion of competition in the liberalised energy markets has evolved over time. Increasingly, it has been resorting to quasi-regulatory measures to foster competition by way of antitrust enforcement under Article 102 TFEU. Accepting unilateral commitments by the firms involved in antitrust proceedings have also become means to restructure the market and promote competition. The commitment procedure under Article 9 of Regulation 1/20031083 allows the Commission to accept and make legally binding commitments offered by defendants in the course of antitrust proceedings when it considers them sufficient to address the underlying competition problem.1084 This procedure has been created in order to accentuate procedural economy and speed. The discrecontracts in France. 1078 Case COMP/39.402, RWE gas foreclosure, OJ 2008, C 310/23. 1079 Cases COMP/39317, E.On gas foreclosure, COMP/39.388, German electricity wholesale market, COMP/39.389, German electricity balancing market, OJ 2009, C 36/8. 1080 Case COMP/39.315, ENI, OJ 2010, C 352/8. 1081 Case COMP/39.316, GDF foreclosure, OJ 2010, C 57/13. 1082 Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28. 1083 Regulation 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in article 81 and 82 of the Treaty, OJ 2003, L 1/1. 1084 Similar procedures exist at national level.

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tion of the Commission when negotiating commitments is limited in theory by the suitability, necessity and proportionality tests defined in Regulation 1/2003. They are intended to make sure that the Commission only addresses the underlying anticompetitive concerns, and does it effectively. The commitment procedure allows the Commission to bargain liberalisation outcomes directly with the incumbents, without going through the interface of national regulatory authorities and Member States. The tendency to use commitments instead of formal decisions has been largely criticised for its inability to clarify ‘the rules of the game’ in a newly opened sector with huge capital needs. The legitimacy of the Commission when it pushes forward the EU liberalisation agenda through the antitrust rules has also been questioned, as well as the suitability of the antitrust tool for this purpose.1085 In this regard, it is worth mentioning the recent Gasorba case1086 where the Court of justice clearly said that the existence of a commitment decision adopted on the basis of Article 9 of Regulation 1/2003 does not preclude national courts from examining whether those agreements comply with the competition rules and, if necessary, declaring those agreements void. It remains to be seen whether it can have an impact on the strategy of the Commission in the energy sector. Last, an important development concerned the enactment and beginning of implementation of the Regulation on Energy Market Integrity and Transparency (thereafter “REMIT”),1087 which introduces a market monitoring framework at the EU level. REMIT came into force in December 2011, and provides for an explicit prohibition of market manipulation, attempted market manipulation and insider trading, together with alternative (to antitrust) enforcement tools. Member States were required under REMIT to endow energy regulators with sufficient investigatory and prosecutorial powers to act upon these prohibitions. The first enforcement actions took place in 2018, for instance in Italy.

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In a first section, this chapter will deal with the general conditions for the ap‑ plication of Article 102 TFEU. The second section concerns dominance: when are firms supposed to enjoy the degree of independence which trig‑ gers Article 102 TFEU? The third and last section relates to the various types of abuses which are or can be prohibited under this provision.

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1085 Hauteclocque, Market Building through Antitrust: Long-term Contract Regulation in EU Electricity Markets (Cheltenham: Edward Elgar, 2013). 1086 Judgment of 23 November 2017, Gasorba and Others, C‑547/16, EU:C:2017:891. 1087 Regulation 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency, OJ 2011, L 326/1.

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2.

Structure and context of Article 102 TFEU

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The text of Article 102 TFEU is composed of a rule and of a non-exhaustive list of examples of conduct which can be caught by that rule. The rule states that: “abuses by one or more undertakings with a dominant position within the common market or a substantial part thereof shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States”.

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In order to assess whether this rule applies, several analytical steps have to be made: –

First, one has to define the conduct under scrutiny.

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The next step concerns the nature of the authors of that conduct: does this firm or do these firms have a dominant position in respect of the goods or services concerned by that conduct? This question implies that a relevant market for these goods or services has to be defined and that the power of the firm or firms on that market is measured.

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If the degree of market power on the market thus defined suffices to establish dominance, the question arises whether the geographic scope of the market corresponds to the common market or a substantial part thereof. If not, the conduct can be assessed under national rules on dominant positions, but not under Article 102 TFEU.

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The next question concerns the conduct as such: is it abusive? In order to answer this question, the examples listed under Article 102 TFEU may be helpful. It should be noted, however, that conduct that is at first sight caught by this prohibition, may nevertheless be acceptable, if the conduct in question is objectively justified by special circumstances, such as external constraints, or if it is needed to bring about certain efficiencies that will ultimately benefit consumers.1088 The ‘objective justification’ test was clarified in Post Denmark (para. 41, emphasis added): “It is for the dominant undertaking to show that the efficiency gains likely to result from the conduct under consideration counteract any likely negative effects on

1088 See for instance on this Loewenthal, “The Defense of Objective Justification in the Application of Article 82 EC”, 28(4) World Competition (2005), 461-463.

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competition and consumer welfare in the affected markets, that those gains have been, or are likely to be, brought about as a result of that conduct, that such conduct is necessary for the achievement of those gains in efficiency and that it does not eliminate effective competition, by removing all or most sources of actual or potential competition.”1089 –

The last check concerns the effect on trade of that conduct. As will be discussed below, this check does not have much practical relevance when the other conditions and in particular the geographic impact criterion are already fulfilled.

From a practical point of view, it is not always necessary to go through all the analytical steps identified above. It often suffices to focus on the condition which is unlikely to be fulfilled. For example, if the conduct is clearly not abusive, there is no need to define the relevant market. Conversely, if the firm in question is manifestly not dominant, an examination of the contested conduct becomes redundant. Of course, the enforcement of Article 102 TFEU does not have to wait until after the full effects of the abusive conduct have realized.

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2.2 Public measures and conduct by firms Article 102 TFEU pursues together with the other competition rules discussed in this book the same Treaty objective of undistorted competition. Although Article 102 TFEU also applies to conduct of publicly owned companies, it does not apply to State conduct and public measures. Public conduct that distorts competition may be caught by the Treaty rules on state aid, laid down in Articles 107 and 108 TFEU, or by Article 106 TFEU. These provisions are examined under Parts 5 and 6 below. It should be noted, however, that Article 106 TFEU can be applied in conjunction with Article 102 TFEU, in particular where public measures reinforce dominant positions held by publicly owned firms or by firms enjoying certain exclusive rights or where these rules lead such firms to abuse their dominance.1090 Article 106 TFEU is also relevant where a dominant firm has been entrusted with a mission of general economic interest. As will be discussed in Part 6, Article 106(2) TFEU provides for a general exception excluding the application of Union competition rules in situations where such application would jeopardize the proper fulfilment of that mission.1091

1089 Judgment of 27 March 2012, Post Denmark, C‑209/10, EU:C:2012:172. 1090 See judgment of 17 July 2014, Commission v DEI, C‑553/12 P, EU:C:2014:2083.. 1091 Judgment of 27 April 1994, Almelo, C‑393/92, EU:C:1994:171.

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2.3 Structural control and conduct control 3.350

Although the Merger Regulation and Article 102 TFEU both deal with dominance, they do not apply this concept in the same manner.1092 Regulation 139/2004 imposes a system of a priori or ex ante control of concentrations, i.e. mergers, take-overs and certain joint ventures. It is prospective in nature. It aims to protect the structure of the market and applies before the parties to the concentration actually act together on the market. By contrast, Article 102 TFEU applies to past or ongoing market conduct. It is therefore retrospective in nature. These differences explain why the finding of dominance by the Commission under the Merger Regulation does not necessarily bind the Commission or other administrative or judicial authorities in the context of Article 102 TFEU.1093

2.4 Conduct control and the merger test 3.351

A question which has arisen since the adoption of the new rules on merger control concerns the scope of the concept of dominance. Until 1 May 2004, European merger control prohibited mergers which would create or reinforce a dominant position. It was generally assumed that, although applied differently, the concept of dominance was identical under the merger control rules and under Article 102 TFEU. Since 1 May 2004 the Merger Regulation prohibits mergers which significantly impede effective competition in the common market, in particular as result of the creation or reinforcement of a dominant position. Recital 25 of that Regulation states that this new test was already embodied in the old dominance test and that the modification was made for reasons of legal certainty only. If this is true, logic commands that the significant impediment of effective competition test is also included in the dominance concept of Article 102 TFEU. As will be shown below, this finding could considerably extend the scope of Article 102 TFEU to oligopolies of a non-collusive nature.

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This leads us to focus on the similarities and differences between Articles 101 and 102 TFEU. The provisions are similar in that they both deal with past or ongoing market conduct. They also share some common concepts, such as the concept of undertaking, the notion of internal market and, to a lesser extent, the concept of effect on trade (see Chapter 1). The differences are twofold: the nature of the conduct and the nature of the firms in question. Article 101 EC 1092 Council Regulation 139/2004 on the control of concentrations between undertakings, OJ 2004, L 24/1. 1093 Judgment of 22 March 2000, Coca-Cola v Commission, T‑125/97 and T‑127/97, EU:T:2000:84.

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TFEU concerns collusion between two or more firms. By contrast, Article 102 TFEU regards the conduct, including unilateral conduct, of dominant firms. These differences imply that compliance with Article 101 TFEU does not necessarily shield a firm from the application of Article 102 TFEU and that the inapplicability of Article 102 TFEU does not automatically protect a firm against the application of Article 101 TFEU. It should be noted however that the Notice (paragraph 30) foresees that conduct that is objectively required to achieve certain efficiencies is not considered abusive, if this conduct meets conditions identical to those listed in Article 101(3) TFEU. This means that abusive conduct, in the form of collusive practices within the meaning of Article 101(1) TFEU, that meet the conditions of Article 101(3) TFEU, should no longer be caught by Article 102 TFEU. Paragraph 31 of the Notice recalls the principle of Article 2 of Regulation 1/2003 that the burden to prove that these conditions are fulfilled lies with the dominant firm that invokes the objective justification.

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In the recent CEAHR/Commission case (T-712/14),1094 the General Court clarified that “the Commission did not err in evaluating the likelihood that the refusal to supply at issue would produce anticompetitive effects constituting an abuse within the meaning of Article 102 TFEU by relying, inter alia, on the conditions set out in the case-law relating to Article 101(1) TFEU, which serve to verify that selective distribution or repair systems do not give rise to a restriction of competition which is incompatible with that provision, in particular since it based that evaluation on other factors capable of demonstrating the absence of a risk that all effective competition would be eliminated” (ground 98).

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2.6 Union law and national law: geographic impact Most if not all Member States have adopted competition provisions comparable to Article 102 TFEU. The main difference between the Union text and its national counter-parts concerns the geographic impact of the dominant position and the intra-community effects of the contested conduct. Article 102 TFEU requires that the dominant position is held in the internal market or in a substantial part thereof and that the abusive conduct affects trade between Member States. Since the conduct of a dominant company is likely to have an automatic effect on interstate trade, the concept of effect on interstate trade does not have much practical importance to distinguish dominant positions which are caught by Article 102 TFEU from those governed by comparable provisions of national 1094 Judgment of 23 October 2017, CEAHR v Commission, T‑712/14, EU:T:2017:748.

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law. The condition that the dominant position must be situated on the internal market or a substantial part thereof has more practical relevance. The “substantial part” criterion implies that the dominant position should be significant from a European-wide perspective and therefore excludes purely local situations from the scope of Article 102 TFEU. The Court has held that a dominant position covering a whole Member State necessarily has such significance.1095 Infrastructure which plays an important role in intra-community traffic is also likely to fulfil this condition: e.g. large airports, such as Frankfurt and Paris, ports important for intra-community trade, such as Holyhead, Roscoff, Rölby, or ports which have an important hinterland, such as the port of Genova.1096 When applied to the energy sector, the “substantial part” criterion implies that companies controlling the high voltage grids and/or the gas transport network may be dominant within the meaning of Article 102 TFEU, whereas the conduct of operators of local distribution networks is more likely to be assessed under national law.

2.7 Union law and national law: effect on trade 3.357

Even if a firm is dominant on a substantial part of the internal market, its (abusive) conduct will only be caught by Article 102 TFEU when it affects trade between Member States. Generally speaking, this condition will be met relatively easily: the conduct of dominant firm takes place in an increasingly integrated internal market and will therefore have a nearly automatic effect on trade. This applies in particular to exclusionary practices which are intended to keep competitors out of (national or regional) markets and hence to obstruct further market integration. By contrast, if the dominant firm exploits its dominant position to the detriment of customers on a national market or part thereof, the effect on trade criterion may have some practical relevance. In its Notice on the concept of the effect on trade, the Commission considers that purely local abuses do not have such an effect.1097

1095 Case BRT/SABAM II, 127/73, ECR 1974, p. 51; Case Alsatel, 247/86, ECR 1988, p. 5987. 1096 Case Rodby, OJ 1994, L 55/52; Case Holyhead, 22 Comp. Rep. paragraph 219; Case Morlaix, 25 Comp. Rep., paragraph 43; Case Frankfurt Airport, OJ 1998, L 72/30; Judgment of 12 December 2000, Aéroports de Paris v Commission, T-128/98, ECLI:EU:T:2000:290. 1097 OJ 2004, C 101/81.

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2.8 Union law and national law: substantive differences From a substantive point of view, it should not make much difference if conduct is assessed under Article 102 TFEU or under comparable national law. Article 3 of Regulation 1/2003 which lays down the procedural principles governing both sets of rules ensures consistency in their application and interpretation. If certain conduct is caught by Article 102 TFEU, national courts and authorities must apply Article 102 TFEU when they apply comparable national rules. In addition, the general principles of Union law require that the application of national rules does not lead to approving conduct that is prohibited by Article 102 TFEU.1098 However, Article 3 explicitly authorizes Member States to adopt stricter national rules. In other words, conduct that is not prohibited by Article 102 TFEU may still be caught by national law. This can be useful to tackle abuses by firms which might not be considered dominant under Union law. It follows from recital 8 of Regulation 1/2003 that the authorization for Member States to adopt stricter national provisions concerns in particular rules on the abuse by dominant firms of that position on undertakings dependant on them. Such rules, for example, exist in France.

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2.9 Competition law and sector specific law Article 102 TFEU is Treaty law; i.e. primary law. This means that, in the hierarchy of norms, it will prevail over secondary legislation, such as the Directives adopted by the Council and the European Parliament in the energy field. Although the internal market directives for electricity and gas both require Member States to install regulatory authorities that shall, inter alia, be responsible for ensuring effective competition in the energy markets through a system of ex ante control, Article 102 TFEU will continue to apply alongside the sector specific measures taken by these regulators. In other words, a refusal to give access to a certain infrastructure or the application of non-authorized tariffs may not only be an issue under national rules for the implementation of the two Directives, but also under Article 102 TFEU.

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Similarly, compliance with sector specific rules or instructions does not necessarily shield the network operators from the application of Article 102 TFEU. Article 102 TFEU obviously continues to apply to conduct that is not governed by sector specific rules. Such principles were at the basis of the ruling of the General Court, confirmed by the Court of Justice, in the Deutsche Telekom case. That case concerned a margin squeeze in the telecommunications sector.

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1098 Judgment of 13 February 1969, Wilhelm and Others, 14/68, EU:C:1969:4.

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The fact that the wholesale price charged by Deutsche Telekom was regulated did not prevent it from increasing the retail price and hence from squeezing the margins of its competitors. The General Court considered that Deutsche Telekom could only rely on sector specific rules if these rules had actually imposed both tariffs.1099 It should be noted, however, that the Commission may rely on sector specific rules to assess the expediency of enforcement action in a regulated sector. For example, it follows from paragraph 83 of the Notice that the Commission is unlikely to apply Article 102 TFEU in a refusal to supply case, where sector specific rules already impose such an obligation.

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The Deutsche Telekom saga evidenced the risks of jurisdictional confusion arising from the concurrent application of sector-specific rules and the antitrust laws. This may create legal uncertainty and an increased regulatory burden for firms as it opens new prospects for inconsistent decisions, especially if claimants start to sue competitors before several jurisdictions. On the contrary, consistency in enforcement limits legal uncertainty by reducing the risk of litigation and the resulting costs and delays. This also protects an operator against competitors’ strategic use of the Court system. This is crucial when it comes to sink large investments and thus largely relates to security of supply in energy. The judgment also once again raised the question of the allocation of regulatory powers in liberalized industries as a comparative perspective shows that sector-specific regulation and antitrust policy have their respective strength and weaknesses. Sector-specific regulators tend to have more discretionary powers and courts more easily defer to their decisions due to their expertise. The ex ante nature of their actions also increases legal certainty, which tend to make new entrants favour regulatory over antitrust oversight. The level of industry expertise, a priori superior in regulatory authorities, is also an important factor of differentiation. National regulators nonetheless tend to face more pressure from political powers and industry.

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Finally, the relation between sector specific rules and competition rules may be different in a purely national context, in which Article 102 TFEU does not apply. If the Treaty does not apply, the question of the hierarchy of norms is determined by national law. Or, to put it differently, the application of sector specific rules in a purely national context may imply that national competition rules cease to apply.1100 1099 Judgment of 10 April 2008, Deutsche Telekom v Commission, T‑271/03, EU:T:2008:101, grounds 85 to 90, confirmed on appeal in judgment of 14 October 2010, Deutsche Telekom v Commission, C‑280/08 P, EU:C:2010:603. 1100 In Trinko, the US Supreme Court considered that a refusal to grant access to telecommunications infrastructure was not contrary to Section 2 of the Sherman Act, although the same refusal had been declared

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3.

The existence of a dominant position

3.1 Concept As indicated above, the concept of dominant position within the meaning of Article 102 TFEU points to such a degree of market power that the firms in question can act without taking into account their competitors, purchasers or suppliers. Ever since the Court’s judgment in United Brands, the concept has been defined as “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors”.1101

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The concept of independence suggests that the firm in question has the ability to price above the competitive level or reduce output without losing turnover. However, the Court notes that the existence of fierce price competition, which normally prevents a firm from charging higher prices, is not necessarily incompatible with the concept of independence underlying Article 102 TFEU. Nor are short run losses incompatible with the concept of dominance.

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3.1.1 Dominance, a special responsibility It should be repeated that Article 102 TFEU does not prohibit dominance, but regulates the conduct of dominant firms. The finding of dominance nevertheless implies a considerable burden for the firm in question. According to the Court of Justice, dominant firms bear a “special responsibility, not to allow its conduct to impair undistorted competition on the common market”.1102 This responsibility considerably limits their commercial freedom: commercial conduct that is allowed for non-dominant firms is not tolerated for dominant firms. In particular, the special responsibility of a dominant undertaking considerably curtails its possibilities to price discriminate and to maintain exclusive business relations. contrary to sector specific telecommunications rules. Verizon Communication v. Trinko, 13.01.2004, No. 02/682, 540 US 2004. For more on this see Hauteclocque, Marty and Pillot, ‘The Essential Facilities Doctrine in European Competition Policy: The Case of the Energy Markets’, in Glachant, Finon and Hauteclocque (eds.), Competition, Contracts and Electricity Markets: A New Perspective, Cheltenham: Edward Elgar, 2011, 259-291. 1101 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22. 1102 Judgment of 9 November 1983, Nederlandsche Banden-Industrie-Michelin v Commission, 322/81, EU:C:1983:313.

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3.1.2 Dominant position and relevant market 3.367

Whatever its duration, dominance necessarily concerns a market: Article 102 TFEU requires a firm to hold, individually or together with other firms, a dominant position on a given market, the geographical dimension of which should at least cover a substantial part of the internal market. This means that the definition of the relevant market is a necessary analytical step in any abuse of dominance case. For this purpose, the 1997 Notice on the definition of the relevant market lays down the tools which focus on the cross-elasticity of demand of the products or services under scrutiny.1103 The relevant product market roughly corresponds to the circle of products or services, which from the consumer’s point of view satisfy the same or similar demand and, hence, for which the prices interact. In order to define the relevant geographical market, the same exercise of measuring price interaction has to be carried out from a geographical point of view. For a detailed examination of the relevant market, see Part 2 above.

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Even so, the price interaction or cross elasticity of demand test used to determine the relevant market may be flawed where the prevailing prices used to carry out that test have already been affected by the supra-competitive prices of the dominant firm. In other words, where a dominant firm has already increased its prices above competitive levels, those prices do not offer the proper benchmark for market definition purposes. The appropriate benchmark to measure crosselasticity of demand should be the competitive price. Otherwise, the market may be defined too widely, as it might include products or geographic areas, which only impose a competitive constraint due to the fact that prices have already been elevated above competitive levels.1104

3.2 Horizontal dominance 3.369

Although the concept of dominance is identical in all circumstances, the factual situations to which it applies can differ. Several types of dominance can be distinguished. Firstly, one can distinguish horizontal from vertical dominance. Horizontal dominance implies that a firm is dominant in respect of its competitors on the same relevant market. Horizontal cases often raise complicated issues: the relevant market needs to be properly defined and the relative strength of the players on that market needs to be measured.

1103 Notice on definition of relevant market, OJ 1997, C 372/5. 1104 See Elsam case, Danish Competition Appeals Court, 15 November 2006, discussed below.

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These difficulties do not arise, however, if the firm or firms under scrutiny hold exclusive rights or statutory monopolies for certain activities, such as the supply of electricity or gas to non-eligible customers or non-liberalized mail delivery.

3.3 Vertical dominance Vertical dominance is easier to establish than horizontal dominance. Vertical dominance essentially concerns the after-markets or downstream markets of the market dominated by the firm in question. For example, a firm which makes a unique type of equipment is likely to have a dominant position for the market for spare parts of that equipment.1105 Similarly in many cases a firm supplying the main equipment is likely to be dominant on the market for consumables used in that equipment.1106 The relative ease to define narrow vertical markets and the fact that in vertical cases the narrowly defined market is nearly always dominated by the firm in question explain why the majority of abuse of dominance cases concern vertical dominance.

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3.3.1 Essential facilities Vertical dominance, or the ability to control downstream markets, is likely to arise in situations where the firm in question controls a so-called “essential facility”. These are mostly infrastructures, which cannot be duplicated for technical, environmental or economic reasons and to which access is required for those wanting to compete on downstream markets. High voltage electricity grids or gas transport networks are usually considered as essential facilities. Outside the energy sector, various examples can be found, such as airports (Frankfurt), maritime ports (Genova) or the so-called local loop in the telecommunications business.1107

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Originally coming from the US case law and scholarship, the essential facilities doctrine has proven to be a controversial concept. Under certain circumstances, the essential facilities doctrine holds, as a first approximation, that a dominant firm may incur antitrust liability if it does not provide access to competitors on a non-discriminatory basis to one of its assets (tangible or intangible), especially when sharing is feasible and when the proof is provided that competitors cannot

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1105 Judgment of 20 February 1979, Buitoni, 122/78, EU:C:1979:43. 1106 Judgment of 20 February 1979, Buitoni, 122/78, EU:C:1979:43, judgment of 12 December 1991, Hilti v Commission, T‑30/89, EU:T:1991:70. 1107 Case IV/34.801 FAG – Flughafen Frankfurt/Main AG, OJ 1998, L 72/30; judgment of 10 December 1991, Merci convenzionali Porto di Genova, C‑179/90, EU:C:1991:464; Case COMP/C-1/37.451, 37.578, 37.579, Deutsche Telekom AG, OJ 2003, L 263/9.

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obtain or create an alternative facility on their own.1108 Its application may thus lead to compel a dominant firm to grant access to one of its assets if necessary to ensure effective competition.1109

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As in the US, the Commission and Union Courts also used essential facilities principles without clearly acknowledging them,1110 especially in cases involving intellectual properties and network industries. Indeed, both for physical infrastructures and intellectual property rights, the essential facilities doctrine was used as a means to stimulate (or even create) an effective competition between firms. The European acceptance of the essential facilities doctrine is coherent with most of the case law on unilateral refusal to deal. For example, the Commercial Solvent judgment showed that, in some circumstances, the refusal to supply a competitor with an essential input could be considered a violation of Article 102 TFEU. The essential facilities doctrine and refusal to deal cases in general do not have an autonomous legal basis in the EU Treaty. These cases will therefore have to be qualified according to the traditional case law under Art 102 TFEU.1111

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An interesting dimension of this line of case law is the underlying theory of competition it results from, namely what is the antitrust authority’s conception of what competition is deemed to achieve and what is the responsibility of the dominant firm vis à vis the competitive process. The debates surrounding the application of the essential facilities doctrine are characteristic of a classical trade-off in antitrust policy between static and dynamic efficiency. An extensive application of the essential facilities doctrine may indeed be analyzed as a preference given to access-based policies, which may enhance consumer welfare in the short term by facilitating entry, over policies supporting infrastructure investment and thus longer-term efficiency criteria. However, a well-balanced competition policy must also consider that the monopolistic position of an infrastructure owner is, in a Schumpeterian perspective, its first incentive to invest. Even if it then charges supra-competitive prices, the initial investment might still be favourable to long term welfare. Besides, by refraining to mandate access, a competition authority increases incentives to invest for both the asset owner and its competitors. 1108 Waller and Frischmann, “Revitalizing Essential Facilities”, 75(1) The Antitrust Law Journal (2008), 1-65. 1109 Cotter, Essential Facilities Doctrine, Legal Studies Research Paper 08-18 (2008), University of Minnesota Law School. 1110 Géradin, ‘Limiting the Scope of Article 82 of the EC Treaty: What can the EU Learn from the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS and Deutsche Telekom?’, 41(6) Common Market Law Review (2004), 1519-1553. 1111 Cowen, “The Essential Facilities Doctrine in EC Competition Law: Towards a “Matrix Infrastructure”, in Hawk (ed.), Annual Proceedings of the Fordham Corporate Law Institute 1995, (Sweet & Maxwell, 1996); Doherty, “Just What Are Essential Facilities?”, 38 Common Market Law Review (2001), 397-436.

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US authorities tend to define competition in terms of market performance and contestable competition. In the later sense, a market would be considered competitive as long as prices approach marginal costs. Consequently, a competitive market is not automatically characterized by a large number of competing firms as long as it remains contestable, i.e. that there is no undue barrier to entry and exit. In some specific markets, artificially creating a large number of firms may even harm consumer welfare and worsen economic performance. For instance, in technological markets, a first-mover may serve for a period of time the whole market and need to charge supra-competitive prices in order to recoup its previous investment. Therefore, the competitive process can lead to a market structure in which only one firm can serve all the market.

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On the contrary, the Union Courts has long recognized that a dominant firm has the special responsibility for not impairing a genuine and undistorted competition in the common market. Because of its particular position on the market, a dominant firm is not allowed to adopt some strategies considered acceptable from other competitors as their implementation could irremediably compromise the chances of competitors to succeed. Here, the benefits from competition flow directly from the atomistic structure of the market. In this framework, a dominant firm controlling an essential facility may thus be considered as a “critical operator” 1112 whose strategy could definitively alter the market structure and thus limit the gains of a competitive process. Such a view of the competitive process naturally justifies restricting the strategic autonomy of dominant firms. According to the Hoffmann-Laroche decision for instance, a dominant firm must refrain from doing anything that would hinder “the maintenance of the degree of competition still existing in the market”. European antitrust authorities thus impose a special responsibility to preserve the competitive structure of the market on dominant firms.

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This traditional position on dominant firms seems to apply in full when it comes to essential facilities. In addition, the fact that sector-specific regulation already applies does not restrain the use of the antitrust laws. In the current context of European energy markets, the imperfect unbundling achieved by the liberalization Directives, the enduring collective dominance of historical incumbents and the increasing use of the commitment procedure seem to create the perfect conditions for a particularly strong application of the essential facilities doctrine under the EU antitrust rules in the energy sector.

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1112 Frison-Roche, “Proposition pour une Notion: l’Opérateur Crucial”, Recueil Dalloz (2006).

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3.3.1.1 Essential facilities: infrastructure The GVG decision, for instance, is particularly interesting here. The Georg Verkehrsorganisation GmbH is a German railways firm, which wanted to provide international passenger freight from Germany to Milan. It was thus necessary for GVG to access the Ferrovie dello Stato network and to obtain traction to move the train (e.g. locomotives and staff ) on the Italian network. As the Ferrovie dello Stato refused to contract with GVG, the latter lodged a complaint before the Commission under Article 102 EC. The Commission found that: (i) GVG had no alternative than using the Ferrovie dello Stato network; (ii) the Ferrovie dello Stato refusal to grant access was not justified by objective reasons; (iii) the consequence of the FS refusal was to eliminate all competition. It is also worth noticing that the Commission even went on to apply the essential facilities doctrine to locomotives and staff, thereby going beyond the application of the concept to the non duplicable infrastructure. 3.3.1.2 Essential facilities: information

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The concept of essential facility does not always relate to infrastructure. It can also relate to certain information, which is necessary to be active on downstream markets, such as television listings or telephone subscriber data for companies wanting to publish, respectively, television guides or telephone directories. The issue of subscriber data can affect all industries, including the energy sector. Customer information may be an essential input for those who want to make studies about market trends in that sector. Similarly, information held by grid operators concerning connections, customer switching and customer profiles also has a chance of being considered as essential information for companies active downstream.

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This was for instance the position of the French competition authority in its interim decision of 9 September 2014 (Décision n°14-MC-02) where it ordered GDF to grant access on fair and non-discriminatory terms to its regulated customer database within 3 months. Direct Energie, a new entrant in the French electricity and gas markets was complaining about several anti-competitive abuses by GDF, in particular anti-competitive tying, confusion between regulated and non-regulated activities, unfair commercial practices and anticompetitive use of its regulated customer database.1113 The French competi1113 In another case, the French competition authority also found that EDF had given a non-replicable competitive advantage to its subsidiary providing solar panels by letting that subsidiary use its brand image, thereby creating confusion for the consumer (Decision n° 13 D20 of 17 december 2013).

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tion authority considered that this database was used by GDF to target past and existing regulated customers and offer them free market offers. GDF was also using different ‘win back’ strategies to regain former customers. The French competition authorities considered that this database could not be replicated at reasonable costs and under a reasonable timeframe. Given the state of market opening, characterised by a very low rate of customer switching, the use of this database was likely to grant GDF an unfair advantage and create exclusionary effects.1114 At the time, there are only few cases relating to how data can confer an unfair advantage and how its use can amount to a breach of competition rules. These cases mostly relate to how a subsidiary could use the contact details of the mother company’s customers, which is, in the end, follow a fairly standard competition law approach. Cases concerning data driven tech companies such as Amazon or manufacturers that bundle product and energy like car manufacturers are yet to come.

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3.3.1.3 The Bronner case It should be noted, however, that mere economic dependence or the inability to invest does not automatically give rise to an essential facility.

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In the European Union, the Bronner1115 case is the landmark decision. In that case, a small Austrian newspaper publisher requested access to the newspaper distribution system of its main competitor, Mediaprint. Bronner argued that its small output did not justify the putting into place of its own delivery system and that access to Mediaprint’s network was therefore indispensable. The Court did not accept this argument. It held that Bronner had alternative means to distribute its newspapers, such as mail delivery, shops and kiosks and that the absence of an economic justification for Bronner to invest in its own distribution network did not constitute an objective obstacle for the creation of a parallel network. It results from this case that networks or other inputs can be regarded as essential only if they cannot be duplicated for objective reasons. The case law therefore defined three main conditions for the essential facilities doctrine to apply: (i) access must be essential for carrying out the applicant’s business; (ii)

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1114 Generally, dominant companies should not abuse their privileged position towards end customers on regulated segments to create distortions on non-regulated markets. See for instance on this the decision of the Spanish Competition Commission of 20 September 2011 in Case n° S/0089/08 concerning Union Fenosa and Hidrocantabrico. 1115 Judgment of 26 November 1998, Bronner, C‑7/97, EU:C:1998:569.

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access must be denied without objective justification; (iii) the refusal must prevent any competition in related markets.

3.3.2 Essential facilities in the energy sector 3.384

In the energy sector and in network industries in general, the essential facilities doctrine has rarely been used explicitly but a broad range of legislative acts and antitrust decisions have been inspired by related concepts. The development of the essential facilities doctrine in Europe has largely coincided with the liberalization of network industries and there is indeed no doubt that, due to their asserted natural monopoly characteristics, the Commission and its officials consider energy networks, including interconnectors, as essential facilities whose access is required to allow effective competition in related markets. In general, it is not economical to duplicate these installations. Still, gas pipelines are not necessarily natural monopolies. Unlike electricity streams which can not be directed, gas shipments can be steered. For long distance international gas transports, shippers can choose between various transport routes. Recital 7 of Regulation 1775/2005 on conditions for access to the natural gas transmission networks, explicitly acknowledges the existence of this pipe-to-pipe competition and the need to take account of this competition when determining access tariffs. Firms owning non-competing networks control access to the downstream market for the supply of electricity or gas in the areas covered by these networks. It follows from the Commission’s decisional practice that electricity and gas networks, as well as interconnectors, can be qualified as essential facilities, which fall within the scope of Article 102 TFEU.1116

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The principles of the essential facilities doctrine in the European legislation are reflected in the concept of third-party access, which refers to a cluster of issues that encompass provisions on unbundling, non-discriminatory access to transmission and distribution grids as well as balancing services. Mandating access to networks has been one of the most important competition issues in energy since the beginning of liberalization and the commitments of E.ON and RWE to divest their transmission networks showed that the Commission was putting pressure through antitrust to support the objectives of the sector-specific legislation. 1116 See COMP/39.402, RWE gas foreclosure, OJ 2008, C 310/23; Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28; Case COMP/39.315, ENI, OJ 2010, C 352/8. See also Marathon settlements, latest press release IP/04/573, 30 April 2004; Gas and electricity interconnectors UK/Belgium, IP/02/401, 13 March 2002 and UK/France, IP/01/341, 12 March 2001.

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Furthermore, official precedents can be found in national competition policy, for instance in German law, where the Federal Cartel Office has an important role to play in supervising access and pricing conditions applied by operators of distribution and transport grids.1117 In a certain sense the Cartel Office has filled the regulatory lacuna before a sector-specific regulator was created. Similarly, the Dutch competition agency (NMa) intervened in 1998 to fine the then Dutch high voltage grid operator for refusing to grant access to Norsk Hydro.1118 At that time no sector specific regulator existed. The complementary role of competition law is also illustrated by an intervention of the NMa in an area not covered by sector specific regulation: the purchase prices paid by Essent to small local producers.1119 Another example is offered by the intervention of OFGEM against the anti-competitive conditions of electricity connection services imposed by SP Manweb, a wholly owned subsidiary of Scottish Power. SP Manweb discriminated between Scottish Power and other suppliers as regards the timing and accuracy of connection information.1120

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Although the Commission and national authorities have held that gas storage facilities constitute separate relevant markets, gas storage facilities do not necessarily constitute essential facilities.1121 It is submitted that a gas storage facility only gives rise to dominance within the meaning of Article 102 TFEU if the storage facility is the only facility or largest facility in its service area. This area roughly corresponds to a geographical circle with a radius of 200 to 250 km around that facility. If the facility under scrutiny faces competition in this service area and if it is therefore compelled to price competitively, it cannot be considered dominant for the purposes of Article 102 TFEU.

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3.4 Individual and collective dominance Article 102 TFEU not only concerns dominant positions held by a single undertaking, such as the position held by the owner of an essential facility, but also dominant positions which one firm holds together with other firms. This implies that Article 102 TFEU can be applied to unilateral conduct of each of the collectively dominant firms. One of the first cases in which the Court of Justice 1117 See e.g. for distribution Stadwerke Mainz, FCO 9.10.2003, procedure against RWE Net, press release 21.02.2003. The Bundesgerichtshof further specified the conditions for ex post price control in its ruling of 7 February 2006, Strom II plus, KZR 8/05. 1118 SEP v. NMa, 03/76, CBB, 21 June 2004. 1119 Press release NMa, 30 September 2004. 1120 OFGEM, 27 October 2005, 234/05a, SP Manweb. 1121 Case COMP/M.3410, Total/Gaz de France, OJ 2005, C 4/3.

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dealt with the issue of collective dominance was the Almelo case, in the electricity sector. The Court ruled in that case that “Article 86 [now Article 102 TFEU] of the Treaty precludes the application, by a regional electricity distributor where it belongs to a group of undertakings occupying a collective dominant position in a substantial part of the common market, of an exclusive purchasing clause contained in the general conditions of sale which prohibits a local distributor from importing electricity for public supply purposes and which, in view of its economic and legal context, affects trade between Member States”. For such collective dominance to exist the Court considered that “the undertakings in the group must be linked in such a way that they adopt the same conduct on the market”.1122

3.4.1 Collective dominance: groups of undertakings 3.389

The case law has gradually specified what should be understood as a group of undertakings to which the concept of collective dominance can apply. Before explaining this concept, it is important to recall the concept of “undertaking” itself, which refers to any entity exercising an economic activity and controlled by the same shareholders. This notion implies that the concept of undertaking also encompasses holdings, concerns or groups of undertakings. A group of companies is considered to be one undertaking for the purposes of Article 102 TFEU if these undertakings are ultimately controlled by the same shareholders. In Almelo, however, the Court of Justice used the term “group” to refer to a different situation, i.e. a scenario where several independent undertakings act together, even if they are not controlled by the same shareholders. In other words, the concept of collective dominance includes situations where several independent groups act as a group.

3.4.2 Collective dominance: economic and legal links 3.390

Such a situation may arise if the undertakings in question have economic or legal relations which make it plausible that they will act in a similar manner. In the maritime sector, for example, conference or consortia agreements may imply that the parties to that agreement act in common vis-à-vis third parties.1123 The General Court specified in this respect that competition between the members of the conference or the consortium is not necessarily incompatible with collective dominance.1124 A close knit of minority shareholdings and/or various li1122 Judgment of 27 April 1994, Almelo, C‑393/92, EU:C:1994:171, ground 42. 1123 Judgment of 8 October 1996, Compagnie maritime belge transports and Others v Commission, T‑24/93 to T‑26/93 and T‑28/93, EU:T:1996:139. 1124 Judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245, grounds 653, 695 and 753.

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cense and/or supply agreements may also give rise to a situation in which legally independent undertakings will make a common front.1125 However, collective dominance can also arise when the undertakings in question do not have such bonds and do not contact each other. Indeed, the structure of the relevant market may be such that some or all undertakings operating on that market each have an individual interest to align their market conduct with one another.1126 This scenario of tacit collusion is likely to occur in tight oligopolies with a limited amount of players selling homogenous products or services in a relatively transparent market which can not easily be entered by newcomers. In its horizontal merger guidelines, the Commission has clarified the conditions for such tacit collusion. One important element to underline concerns the probability of immediate retaliation, if one of the oligopolists decides to capture market share by lowering prices. A situation of collective dominance can only prevail in case of collective deterrence and collective deterrence implies the possibility of immediate retaliation.

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Electricity and gas markets appear at first sight likely candidates for collective dominance of the collusive type: the products are homogeneous, the markets are relatively concentrated and transparent for suppliers. For example, in case Grupo Vilar/ENBW/Hidroelectrica del Cantabrico1127 the Commission considered that the Spanish electricity suppliers were collectively dominant. Similarly, the Commission considered in RWE/Essent1128 that the German electricity generation and wholesale market are characterized by a collective dominant position of RWE and E.ON.

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3.4.3 Collective dominance and the significant impediment to effective competition test It follows from the previous paragraph that oligopolies characterized by tacit collusion can give rise to collective dominance and, hence, that the conduct of each of the oligopolists can be caught by Article 102 TFEU.1129 Since the entry into force of the second Merger Regulation, in May 2004, it can be argued that 1125 Judgment of 10 March 1992, SIV and Others v Commission, T‑68/89, T‑77/89 and T‑78/89, EU:T:1992:38; judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246. 1126 Judgment of 25 March 1999, Gencor v Commission, T‑102/96, EU:T:1999:65; judgment of 8 October 1996, Compagnie maritime belge transports and Others v Commission, T‑24/93 to T‑26/93 and T‑28/93, EU:T:1996:139. 1127 Case COMP/M.2434, Grupo Villar Mir/EnBW/Hidroeléctrica del Cantábrico, OJ 2004, L 48/86. 1128 Case COMP/M.5467, RWE/Essent, OJ 2009, C 222/1. 1129 Judgment of 7 October 1999, Irish Sugar v Commission, T‑228/97, EU:T:1999:246.

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the concept of collective dominance also includes other types of oligopolies, in which the market power of the oligopolists does not result from its collusive nature, but from other circumstances. Reference is made in this respect to Recital 25 and Article 2 of the Merger Regulation, which suggest that the concept of dominance encompasses non-collusive oligopolies. The Commission’s horizontal merger guidelines indicate that undertakings in those oligopolies can have market power through product differentiation in the sense that customers appreciate the products or services of these undertakings in a different manner. Although the goods and services belong technically speaking to the same relevant market, customer preference for differentiated goods grants the oligopolist a certain power over price. In 2003 the NMa seems to have applied such an oligopoly test when conditionally clearing the acquisition of Reliant’s Dutch activities by Nuon. Although the decision does not refer to the issue of close substitutes, the analysis directly focuses on the ability of the merged entity and other players in the electricity wholesale markets to increase prices above pre-merger levels. This decision was annulled on appeal, because the appeal courts did not consider that the quantitative evidence put forward by the NMa sufficed to show that the acquisition would create or reinforce non-collusive oligopolies.1130 This outcome could be interpreted in a sense that non-collusive oligopolies do not constitute collective dominant positions within the meaning of Article 102 TFEU. In 2008 the Commission also assessed possible capacity withdrawal strategies in the context of the EDF/BE merger.1131 The merger could enable the new entity to embark in customer (EDF disappearing as a customer) and input foreclosure (BE disappearing as a supplier) tactics, hence reducing liquidity on the British wholesale market. More generally, the Commission was concerned about the liquidity reducing effects of the internalisation of BE sales within the new EDF/ BE group. The theory of harm underlying these concerns is not entirely clear. It seems a mix of vertical and horizontal concerns. One thing is clear however: the combined market share of the new BE/EDF (max. 30%) remained below any dominance threshold. Nor where there any indications of collusive oligopolies on the British wholesale market. It must therefore be concluded that the conduct in which the BE/EDF entity could have embarked, absent the remedies, would not have been caught by Article 102 TFEU.

1130 NMa, 8 December 2003, 3386. See also CBB, 29 November 2006, AZ3274. 1131 Case COMP/M.5224, EDF/British Energy, OJ 2009, C 38/8.

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This finding also raises the question as to the theory of harm upon which the Commission relied when it intervened against E.ON’s conduct on the German wholesale market.1132 In that case the Commission accused E.ON of withdrawing short-term capacity so as to let the market switch for more expensive generation capacity along the merit curve to meet demand. This led to higher prices on the spot market and was seen as a price abuse. Now, the application of Article 102 TFEU requires the existence of a dominant position. This condition was apparently met since E.ON is supposed to be collectively dominant with RWE. Is this collective dominance of the collusive type? If so, E.ON’s capacity withdrawing strategy could only work if RWE decided not to obstruct by releasing additional capacity. Yet, the Commission did not bring a case against RWE. One can only speculate as to the reasons for this selective enforcement. It can be that the Commission considered that the active capacity withdrawal by E.ON was abusive, but that this was not the case for RWE’s passive reaction to that withdrawal. It can also be that the Commission case was relying on new theories of harm along the lines of those underlying its assessment in the EDF/BE case.

3.5 Indicators of dominance The legally required proof to establish dominance will vary in function of the type of dominance. Whereas establishing horizontal dominance can be a difficult exercise, especially if the dominance in question is collective in nature, vertical dominance is easier to demonstrate, in particular where essential facilities are at stake. The firm controlling that facility is by its very essence dominant. Dominance is also easy to establish when the firm under scrutiny enjoys exclusive rights, such as a legal monopoly to supply energy to captive customers. The firm holding such rights has a statutory monopoly and is automatically dominant for the activities covered by that monopoly. It should be noted, however, that intellectual property rights do not by themselves constitute proof of dominance: an exclusive right for a certain good does not grant the holder of that right market power if there are many other goods which are able to satisfy the same customer demand.1133

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The Notice highlights three factors which the Commission will take into consideration when assessing dominance. These factors refer to the constraints under which the firm under scrutiny must operate. The first category of constraints relates to the pressure exerted by existing suppliers and is reflected prima facie in the market shares of the firms concerned. The second constraint refers to po-

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1132 Case COMP/39.388, German electricity wholesale market, OJ 2009, C 36/8. 1133 Judgment of 29 February 1968, Parke, Davis and Co., 24/67, EU:C:1968:11.

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tential competition, i.e. the competition that could occur if new firms enter the market or existing firms expand their output. The third and last constraint refers to the countervailing or bargaining power of the purchasers facing the investigated firm.

3.5.1 Market share 3.398

In the absence of special scenarios, such as the presence of essential facilities or statutory monopolies, market share remains by far the most important tool in assessing whether a firm is dominant. The Court of Justice has systematically held that very large market shares constitute by themselves proof of dominance.1134 The Court’s position on market shares as evidence of dominance has recently been summarized by the Commission in paragraph 435 of its Microsoft decision: “Very large market shares, of over 50%, are considered in themselves, and but for exceptional circumstances, evidence of the existence of a dominant position. Market shares between 70% and 80% have been held to warrant such a presumption of dominance. Microsoft, with its market shares of over 90%, occupies almost the whole market. It therefore approaches a position of complete monopoly, and can be said to hold an overwhelmingly dominant position”.1135 In its TeliaSonera ruling,1136 the Court of Justice stated that “the [...] application of [competition rules] cannot depend on whether the market concerned has already reached a certain level of maturity. Particularly in a rapidly growing market, Article 102 TFEU requires action as quickly as possible, to prevent the formation and consolidation in that market of a competitive structure distorted by the abusive strategy of an undertaking”.

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These percentages are rough indications of both individual and collective dominance.1137 It is not possible to indicate with mathematical precision at which level a market share becomes proof of dominance.1138 Everything will depend on the specific circumstances of the case. As a rule of thumb it can be said that a market share below 25% is clearly insufficient to conclude that a firm is dominant. In United Brands, the Court of Justice also seemed to suggest that no dominance is likely to arise below 40%.1139 The Notice also states dominance is 1134 Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36; judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286. 1135 Case COMP/C-3/37.792, Microsoft, OJ 2007, L 32/23. 1136 Judgment of 17 February 2011, TeliaSonera, C‑52/09, EU:C:2011:83. 1137 Judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245, grounds 932 and 931. 1138 Market shares can be calculated in volume or value terms. The Commission attaches more importance to the latter. See Notice on relevant market, OJ 1997, C 372/5. 1139 Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76,

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unlikely to occur below that percentage. However, In Akzo, the Court referred to 50%, which, as the Commission stated in Microsoft, can by itself be seen as evidence of dominance.1140

3.5.2 Size and importance of competitors One obvious element to take into account when relying on these percentages concerns the position of competing firms. A firm with a 40% market share will not be in a position to act independently of its competitors, if these competitors have market shares of comparable magnitude or if they otherwise exert pressure on the larger firm. If such countervailing competitive forces exclude individual dominance, they are not necessarily incompatible with collective dominance. Nor will a firm with a market share of 40% be in a position to behave independently of its customers, if demand consists of only a few customers.1141 It should be noted in this context that dominance can also occur on the purchasing side of the market and that purchasing power can occur at market share levels lower than 40%.1142

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3.5.3 Stability of market share and price wars It can generally be said that the capability of a firm to maintain high market shares during a prolonged duration is an important indication of its dominance, even if the dominant firm has had to face occasional price wars. Nor is a temporary decline in market shares, which are large in themselves, incompatible with the concept of dominance.1143 The ability to sustain high market shares and to keep potential competition out may indeed be indicative of a firm’s strength, although it would be paradoxical, to say the least, to condemn a firm which is involved in price wars, of imposing excessive prices on its customers.1144 Predatory pricing practices are more likely to occur in such a scenario.1145

3.401

3.6 Temporary dominance Even so, dominance can also occur for a relatively short duration, especially in electricity markets. The inability to store electricity and the inelasticity of deEU:C:1978:22. Judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286. Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36, ground 35. See Case No IV/M.1221, Rewe/Meinl (OJ 1999, L 274/1), where dominance was found at 35%. Judgment of 30 January 2007, France Télécom v Commission, T‑340/03, EU:T:2007:22, ground 104. See Judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22. 1145 Judgment of 3 July 1991, AKZO v Commission, C‑62/86, EU:C:1991:286.

1140 1141 1142 1143 1144

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mand, can grant generators temporary dominance in peak periods. For example, on 7 July 2004, the Spanish Competition Tribunal ruled that three Spanish generators had charged excessive prices and, hence, abused the dominant position which each of them temporarily held in its main area of activities, because of exceptional congestion problems on the Spanish high voltage grid, which lasted only three days.1146

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It is uncertain whether other authorities and in particular the Commission shares the view that such momentary positions suffice to trigger the application of Article 102 TFEU. Price hikes are not an uncommon feature in the electricity industry. Even smaller players may try to exploit momentary situations. This does not imply however that they have the ability to behave independently or price above the competitive level if longer periods are considered. In the future, it is likely that such cases will be pursued under the REMIT framework.

3.7 Potential competition and barriers to entry 3.404

The above mentioned Spanish case is illustrative of the method of dealing with potential competition and market entry. In general, firms can be considered to be dominant under Article 102 TFEU or comparable provisions of national law, if they act without competitive constraints during a certain period and if this time span is sufficiently long to allow them to abuse this position without, as a result being disciplined by customers, suppliers or competitors. Potential competition is not taken into consideration if it comes too late to sanction the conduct of the firm under scrutiny.1147

3.405

Market entry arguments are therefore not easy to uphold in dominance cases, unless it can be shown that market entry is immediate or that it can cause, at a later stage, irreparable harm to the firm that is supposed to have abused its dominant position.1148

1146 Empresas electricas, Tribunal de Defensa de la Competencia, 552/02, 7 July 2004. 1147 See an indication in that sense, judgment of 6 October 1994, Tetra Pak v Commission, T‑83/91, EU:T:1994:246, ground 69 and judgment of 30 January 2007, France Télécom v Commission, T‑340/03, EU:T:2007:22, ground 111. 1148 See also judgment of 30 September 2003, Atlantic Container Line and Others v Commission, T‑191/98 and T‑212/98 to T‑214/98, EU:T:2003:245.

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3.8 Barriers to entry In fact, the absence of potential competition is considered to be an additional indicator of a firm’s dominance. Such an absence will usually result from the difficulties for other companies to enter the market in question. The case law on Article 102 TFEU is not very developed in this respect.

3.406

The Notice lists a series of factors that can be considered as entry barriers: economies of scale, privileged access to essential inputs or natural resources, access to distribution networks, network effects and switching costs. Importantly, it also confirms that the contested conduct itself can create a barrier to entry. This is the case for example where the firm has concluded long term (exclusivity) contracts with large customers or with suppliers of essential inputs. It can be assumed that barriers to entry to power generation and gas exploration are high, but that access to supply markets is fairly easy.1149 The question of barriers to entry is to a large extent academic for network operations, because they are generally considered to be natural monopolies or rephrased in competition law terms as essential facilities (see above).

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3.9 Goodwill, trade marks and vertical integration In its case law, the Court of Justice has listed all sorts of other factors that can be used as additional indicators of dominance. Most of these factors relate to the performance, such as its technological lead or its well developed distribution network, or organization of the firm under scrutiny, such as its vertical integration. A few of these indicators are worth mentioning.

3.409

The first indicator concerns trade marks and goodwill. In recently liberalized markets trade marks and goodwill may have an important influence on switching behaviour. Competition authorities are therefore likely to pay attention to recently unbundled entities. For example, one of the conditions imposed by the Belgian Competition Council on Electrabel for the approval of its acquisition of municipal supply business concerned a clear separation between the logos, trade marks, business premises and call centres of grid and supply operations.1150 The sector inquiry report also lists similar issues, including integrated IT sys-

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1149 Compare Case COMP/M.1853, EDF/EnBW, OJ 2002, L 59/1 and Eneco/Remu, NMa 3282 of 25 February 2003. 1150 Decisions of Competition Council of 4 July 2003 in ECS. See also the EDF Solar Panel case of 2018 where EDF was found to abuse its dominant position by, inter alia, allowing its subsidiary to use the EDF logo, creating confusion in the minds of consumers.

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tems and joint personal policies, as elements that may reinforce the position of established players.

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The second indicator concerns vertical integration. In United Brands the Court of Justice held that the vertical integration of United Brands, in particular the possession of its own banana fleet, gave it a competitive advantage over its competitors. As spelt out in great detail in the sector inquiry report, vertical integration plays an important role in the energy sector, where integration of various activities throughout the production and distribution chain can reduce risk, offer privileged access to generation capacity or to customers, or grant preferential access to networks or to information on customer switching and/or profiles.

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The existence of so called “Chinese walls” within the vertically integrated company may not always suffice to offset these advantages. The Georg/FS case concerning access to railway infrastructure offers a example of conflicts of interests in vertically integrated undertakings. Despite the restructuring of the Italian railways, the rail infrastructure, the traction operation and passenger transport services were all part of the same holding. The Commission noted in this respect that “as the holding company and its subsidiaries are all owned by one and the same shareholder, the latter has an interest in ensuring that behaviour within the FS holding company is sufficiently coordinated” (paragraph 76, see also paragraph 77) and that by virtue of their common interests the subsidiaries could not be seen as legally, administratively and structurally unrelated to each other (paragraph 78).

3.413

This precedent justifies the conclusion that compliance with the ITO/ISO unbundling options foreseen in the Third Liberalisation Package do not necessarily protect the dominant gas or electricity undertaking from enforcement action under Article 102 TFUE.1151 In addition, an ownership unbundled TSO remains the operator of an essential facility, implying that its conduct may fall foul of Article 102 TFEU, as shown by the Commission’s intervention against the discriminatory practice of the Swedish TSO, Kraftnet.1152

1151 DESFA, the non-vertically integrated gas transmission network operator, was fined by the Greek competition authority for failure to provide ALUMINIUM SA with access to the network, which prevented this company from being supplied with LNG by an alternative supplier 20th December 2012, 555/VII/2012). 1152 Case COMP/39.351, Swedish Interconnectors, OJ 2010, C 142/28. See on this Bert Willems and Malgorzata Sadowska, “Power Markets Shaped by Antitrust”, European Competition Journal 9(1), April 2013; “Market Integration and Economic Efficiency at Conflict? Commitments in the Swedish Interconnectors Case”, World Competition: Law and Economics Review 36 (1), March 2013.

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4.

Abuse

4.1 Concept The text of Article 102 TFEU suggests that the abuse must have a direct causal relation with the dominant position. The Court considers however that the question whether or not certain conduct is abusive can be answered independently from the possible link with the dominant position. It states in this respect that the concept of abuse is an objective one that concerns the behaviour of the undertaking rather than its dominant position.

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“The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to other methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition”.1153

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The open ended character of the concept of abuse considerably limits the freedom of a dominant firm to determine its commercial policy. However, Article 102 TFEU does not have as its object to push firms to irrational behaviour. Conduct that at first sight may appear abusive can under certain circumstances be justified, in particular if the dominant firm can show that this conduct makes business sense in itself, that it is justified on commercial grounds and that it is proportionate to achieve this legitimate goal.

3.416

It should be noted, however, that the Courts are reluctant to accept such objective justifications: “It is true that, according to the case-law, the fact that an undertaking is in a dominant position cannot disentitle it from protecting its own commercial interests if they are attacked, and that such an undertaking must be conceded the right to take such reasonable steps as it deems appropriate to protect its interests, provided however that the purpose of such behaviour is not to strengthen this dominant position and abuse it (see, for example, United Brands, cited at paragraph 853 above, paragraph 189; CEWAL I, cited at paragraph 568 above, paragraphs 107 and 146; and Irish Sugar, cited at paragraph 152 above, paragraph 112). It follows therefore that a dominant undertaking may seek to rely on grounds to justify the practices it adopts. However, the justifications permitted

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1153 Judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36, ground 21.

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by the case-law in respect of Article 86 of the Treaty (now 82) cannot result in creating exemptions from the application of that provision. The sole purpose of those grounds of justification is to enable a dominant undertaking to show not that the practices in question should be permitted because they confer certain advantages, but only that the purpose of those practices is reasonably to protect its commercial interests in the face of action taken by certain third parties and that they do not therefore in fact constitute an abuse.” 1154

3.418

Still, the concept of objective justification gradually finds its way in the interpretation of Article 102 TFEU. For example, in British Airways/Commission & Virgin Atlantic, the Court specified that actual or likely restrictive effects can be offset by “advantages in terms of efficiency which also benefit the consumer”; i.e. objective advantages for the consumer and not subjective advantages for the dominant firm.1155

3.419

The Notice develops the concept of objective justification along the lines of Article 101(3) TFEU (see above). If the dominant firm succeeds in showing that its conduct produces substantial efficiencies which outweigh any anti-competitive effects and that this conduct is indispensable and proportionate to pursue that goal, Article 102 TFEU may not apply (see paragraphs 28 to 31).

4.2 Abuse on connected markets 3.4