The fourth quarter is traditionally a period of preparation ahead of the new calendar year and the European Commission conforms to this rule, with most of its initiatives tending to commence at the beginning of the year. Next year is no exception. In January the Commission is due to publish its revised energy policy following extensive consultation on its energy market green paper published in March. January will also see the commencement of the third, and final year, of the first phase of the Emission Trading Scheme before the commencement of the first commitment period of the Kyoto Protocol and, as seems likely, two new member states will join the ever-expanding Community.

Ordinarily, these developments should be cause for celebration but for much of this year the Commission has been on the back foot, defending both its energy and environment policies. It cannot afford another year of reviews and debate on energy and emissions if it wants to retain its integrity and authority in these markets, although there are those who believe these two essential assets of a regulator have already been seriously damaged, possibly beyond repair.

Central to the standing of the Commission will be its handling of two high profile acquisition and merger proposals, namely E.ON’s agreed bid for Endesa and the proposed merger of GDF and Suez. In both cases the Commission is trying to assert its authority on how it believes the internal EU energy market should be structured. Speaking at a conference in September the EU competition commissioner Neelie Kroes said she believed a competitive EU energy market was best served by a series of European, as opposed to national, champions. This view underpins the pressure being applied on the Spanish government to significantly dilute the list of conditions attached to E.ON’s bid for Endesa, with the Commission telling Madrid in no uncertain terms that Brussels should have the final say on how the acquisition is structured. The Commission is taking a similarly forceful approach to the GDF/Suez deal, yet there are signs that Brussels is relaxing some of its beliefs with respect to the merger. Take for example the issue of golden shares. The French government, keen to placate socialist and communist MP’s that have tabled 137 629 amendments between them on the merger, believing a merger of EDF and GDF is in the best interests of the domestic market, has proposed to hold a golden share in GDF when its shareholding in the company reduces to around 30% after the merger with Suez. The Commission is against the concept of golden shares on the grounds that it creates obstacles to foreign investors, yet internal commissioner Charlie McCreevy has recently said the Commission will not contest the golden share as proposed by Paris.

These two mergers/acquisitions raise several questions about the conduct of the Commission toward the development of a competitive market. The most important is the issue of precedence in a member state’s market development. Following the first electricity and gas market competition directives in February 1999 and August 2000 respectively the Commission sat back and allowed the development of a number of dominant national champion utility groups, particularly in France and Germany. But with competition not developing sufficiently in the period since then it has allowed these domestic national champions to quickly evolve into European champions while refusing to allow the further development of national champions. After all, it was the Commission that effectively vetoed the acquisition of Endesa by Gas Natural, with the Spanish government wanting to create a Spanish national champion, which led to the bid by E.ON that was supported by Brussels. It appears that Brussels’ original thinking post 1999 was that national champions would lead to a more competitive market but now, with no real improvement in competition levels, it has decided to endorse the idea of European champions. But in reality neither approach assists in the development of competition because consolidation, whether it be at national or European level, is not a catalyst for a competitive market but a consequence of it.

This inability to manage the development of energy market competition has also undermined the development of emissions trading. Without competition in the energy sector there is less incentive for competition in emissions as the cost of compliance in purchasing allowances is simply passed on to end users. Those end users complaining of utility windfall profits will not see these profits reduced until the energy market itself is more competitive.

Yet there are bigger concerns for the Commission with respect to emissions trading. Its inability to be strict with allowance allocation, and the use of the Linking Directive (i.e. the purchase of Certified Emission Reductions and Emission Reduction Units from the respective Clean Development Mechanism and Joint Implementation projects) to offset compliance requirements, risks undermining the value of trading to reduce emissions.

Another problem with the Commission’s approach to emissions reduction through trading is its apparent preference to use a collective EU Kyoto target as opposed to individual member state targets. By setting a collective target some member states are effectively allowed to be less successful in achieving their individual targets as the more aggressive member states, such as the UK, reduce their emissions so far below their own target as to offset emission reductions for other member states. The Commission should remember that Kyoto did not assign a EU target, it assigned individual country targets.

If the Commission is to assert its authority and repair its integrity it has to incentivise individual member states to meet their own energy competition and emission reduction objectives. Individual governments and regulators understand their indigenous market better than the Commission, yet recent actions and comments from Brussels suggest otherwise. The role of the Commission as ‘over regulator’ should be to act only when the actions of individual member states adversely impact on other member states. The value of Europe’s energy economy is the sum of the individual member states and unless Brussels is prepared to allow these member states to internally develop their own potential it is likely that the vast potential value of an internal EU25 energy economy will not be realised.