Last month the European Union Commission discussed the issue of skewed competition among European Union member states in gas and electricity. The meeting was convened to address issues raised in a new Commission paper on market liberalisation, which although careful not to mention any utilities by name made clear references to the actions of Electricité de France, which are causing the greatest concerns to the Commission.
It is of little surprise that the Commission discussed the issue of market liberalisation, but what is a surprise is that it took the Commission so long to reach these conclusions. Ever since the electricity directive was introduced in February 1999 the Commission has been sitting on a time bomb of its own making.
Although the original directive included measures to prevent unfair competition, such as the negative reciprocity clause, the Commission has seemingly lacked the teeth to rigorously enforce its directive mandates.
Its somewhat passive approach has seen its powers effectively undermined by the more aggressive EU member states, particularly France and Germany, which dominate the European electricity market. Two months ago the Commission was touting a fully liberalised gas and electricity market by 2005, now it is finally opening its eyes to the current reality of a half-liberalised market where competition is not unified or cohesive, and with much lower market liquidity than it would have liked. Until it resolves the current issues it is totally unrealistic to propose any further full liberalisation mandates.
To any observer, the European electricity market contains barriers to competition and market distortions to energy suppliers. The greatest concern is that of negative reciprocity whereby a company with a dominant position in one country is able to use its size to enter another country’s market but is effectively closed to any reciprocal competition or market entry by companies in that country.
Another concern is the imbalance between public and private ownership whereby public companies can acquire another country’s privately held assets, but the public assets are protected. This is evident with EDF, which has made acquisitions in the UK, Italy and Spain but remains effectively protected by the French government from counter acquisition. And then there is the issue of individual member state governments distorting competition by restricting acquisitions of its domestic assets if these cannot be reciprocated.
All the above problems are highly transparent and the extent of these problems appears to be growing. If the Commission wants to preserve its vision of a unified, cohesive and liberalised market without any competition distortions it has to act now. It certainly has the powers to do so but appears reluctant to implement them.
The European market is almost evenly split, with eight countries either having, or being in the process of introducing, full competition, and seven countries at different levels of competition with no no set timetable to fully liberalise. For competition to be effective there has to be a level playing field and until such a platform is in place it is unwise to force through an accelerated timetable for full EU liberalisation. It is not necessary for all EU countries to be at the same level of liberalisation for competition to be effective, but it is important that that there are no barriers to competition between the 15 EU countries.
One of the main problems with the current market infrastructure is regulation. There are 15 different country regulators, with the exception of Germany, which is self-regulated, and an EU regulator. For the market to be effectively and fairly regulated there needs to be some consolidation of regulatory powers with clear lines of responsibility. While the Commission has said it seeks to be a regulator of the 15 individual regulators it may have to reconsider this approach. In doing so it may wish to look at current developments in the US, which is now looking at the possibility of as few as five regional transmission organisations (RTO) to create a seamless transmission market.
Europe can be divided into a small number of demographic regions – such as UK and Ireland, Scandinavia, Benelux and France, Iberian Peninsula, German-speaking market (Germany, Austria and Switzerland) and Southern Europe (Italy, Greece). It could develop RTOs for each of these regions with an overall regulator (the EC) to ensure fair play and competition. Although Europe has been quick to distance itself from US developments in what it sees as a dysfunctional market, now might be the time to take heed of US developments on RTOs if it wants to achieve a fully liberalised and competitive marketplace.
