In November 2004 Andris Piebalgs, the newly appointed EU energy commissioner, surveyed the wreckage of the EU energy market and said he had two options to achieve an internal competitive energy market; either make the existing legislation work or introduce new legislation to refocus the market on competition dynamics. His considered choice was to make the existing legislation work, but following a lengthy sector investigation led by the competition commission Piebalgs conceded defeat and set about drafting new legislation.
On 19 September, with typical Brussels fanfare, Piebalgs, flanked by Commission president Jose Manuel Barosso and competition commissioner Neelie Kroes, walked out to present the Commission’s third legislative energy package in the hope that it would prove third time lucky. But even before the package was unveiled the omens did not look good. Central to the package is ownership unbundling, which has divided member states since the policy was first proposed back in the Spring. But the issue is not so much that ownership unbundling is contentious, but that the Commission has produced three legislative packages to open up the EU energy market to competition since February 1999 yet is still no closer to achieving its objective.
Last month in Madrid the European Commission paid homage to the late Loyola de Palacio, Piebalg’s predecessor as commissioner for transport and energy from 1999-2004 and one of the architects of the first two packages of legislative proposals for Europe’s energy market, at an energy conference in her name. Addressing the ‘European Energy Challenges’ conference, Piebalgs said: ‘At the moment that energy is on the top of the European and global agenda, the vast and ambitious work of Loyola de Palacio shines more than ever.’
And on announcing the Commission’s third package of legislative proposals, two weeks earlier, he proclaimed: ‘We have moved a long way towards an internal energy market in the EU over the last 10 years. It is now time to complete this process and ensure that the benefits of this market are real, effective and available to each and every person and company. The EU now has to take the necessary steps to ensure that all its citizens can choose their own supplier and be sure that they are getting the best deal.’
Few would disagree that the work of de Palacio was ‘vast and ambitious’, but to suggest, as Piebalgs did, that there has been considerable progress toward an internal competitive energy market over the past decade is simply not true. The EU energy market has merely undergone a transition from a series of state-owned, vertically integrated, energy behemoths to a series of national and European vertically integrated energy behemoths with this new breed of utility succeeding by investing in the few markets open to competition whilst keeping its own domestic market closed to competition. The European energy market of today may well have (largely) removed the shackles of state control but it has managed in the process to become a quasi-oligopoly.
For all the ambition of de Palacio, and indeed Piebalgs, the Commission has totally mismanaged the EU energy market, leaving it further from an effective and efficient internal market today than it was a decade ago. The Commission has allowed the framework of a market oligopoly to evolve and in doing so has effectively ceded control of Europe’s energy market to Paris and Berlin, with France and Germany having the majority of Europe’s dominant utility groups. It is not surprising then that these two member states are the most vocal in opposing any initiatives that promote further market competition, such as ownership unbundling, as it is simply not in their interests. After all, the point of domination is surely to remove any competition?
The energy challenge faced by the Commission is spelled out in the initiatives presented in the third package. Rather than build on progress, which a third package arguably should, Piebalgs is instead effectively being forced to break up the market through ownership unbundling. This being so, he has to accept his (and his predecessor’s) failure to make the legislation in the first two energy packages work.
There is certainly nothing wrong with the legislation contained in the first two energy packages. Market reciprocity, enshrined in the first package, is essential if competitive bilateral markets are to evolve, while legal unbundling, if properly managed, should have been sufficient to ensure new market entrants were not placed at a significant competitive disadvantage.
But having been defeated on the first two legislative packages it is surely only a matter of time before the Commission has to accept defeat on the third. Piebalgs will most likely avoid this ignominy, as his term as energy commissioner will probably end (in November 2009) before defeat is finally conceded. The ownership unbundling proposal simply does not have enough support among member states to become effective and the alternative option, allowing ownership of distribution assets but passing the management to a third party, is almost certainly likely to be a non-starter.
No one can doubt the sincerity of the Commission in wanting to create a competitive market, nor that the benefits of a competitive market extend far beyond cheaper prices by providing the investment signals to ensure market security. Yet energy competition has almost become an anathema in Europe. What is more important to these competition-averse utilities is security, yet by denying Europe the opportunity to develop a dynamic and reciprocal competitive market these very utilities are making security harder to achieve. For example, if the EU energy market was more openly competitive, and was more effectively policed by Brussels, the EU energy market would speak with a common voice, which in turn would limit the opportunity for Gazprom to cherry-pick member states for bilateral energy deals.
This in turn would afford more long-term EU energy supply security.
Looking at the contents of the third energy package it is clear the Commission is becoming increasingly ideological as it desperately searches for a solution to make an internal EU energy market work. Yet by allowing the market to do largely as it pleases (ie, not denying mergers and acquisitions that have directly led to the creation of the new breed of energy behemoths) over the best part of the last decade it has arguably lost the respect of the market, forcing its more ideological approach. The Commission needs to take a step back, regain the trust and respect of the market, and then work with the market. Until it does, a truly competitive, secure and sustainable EU energy market may continue to be no more than an aspiration.
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