1. Lars Kjølbye, Head of Unit, DG COMP B-1 22 February 2007 Competition Directorate -General The Energy Sector Inquiry Identified problems and future action

2. The legal framework Article 17 of Regulation 1/2003: “Where the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted within the common market, the Commission may conduct its inquiry into a particular sector of the economy...”

3. The process Launched in June 2005 due to perception that competition was not functioning well –One of the most extensive inquiries in DG COMP history More than 3000 questionnaires sent Preliminary Report on 16 February 2006 Public consultation on preliminary results –Preliminary findings were widely supported by stakeholders Most consider that change is needed urgently Established market players (incumbents) advocate ”wait and see” approach Final Report 10 January 2007 –Commission Communication with technical annex

4. Areas of focus of the inquiry Market concentration Vertical foreclosure Market Integration Transparency Price formation Balancing markets Downstream contracts Liquefied Natural Gas (LNG)

5. Main findings (I) Concentration –High levels of concentration at all levels of supply chain in most geographic markets. Pre- liberalisation market positions are substantially intact Vertical foreclosure –Infrastructure remains largely in the hands of incumbents through ownership or long-term capacity reservations

6. Main findings (II) Market integration –Insufficient cross-border capacity to create integrated and competitive markets –Incumbents generally stay at home Transparency –Lack of reliable and timely market information which is essential for healthy competition to develop Pricing –Lack of confidence that wholesale prices are the result of meaningful competition

7. Main findings (III) Balancing markets –Small zones and high prices and penalties negatively affect new entry Downstream contracts –In some markets long-term contracts between incumbents and customers give rise to foreclosure concerns LNG –Cost disadvantage vis-à-vis pipeline gas is narrowing –A number of projects for new terminals by non- incumbents

8. Unbundling: separation of networks and production/supply Vertically integrated network operators see networks as strategic assets that are used to favour affiliated supply businesses Consequences mainly in three areas: –Access to information –Access to networks –Incentives to invest

9. Asymmetrical access to information There is widespread communication and coordination between network and supply affiliates Affiliates get more complete information and get it sooner

10. Access the networks New entrants are disfavoured –Unused capacity is not fully released or released on unattractive conditions (capacity hoarding) –Delays in obtaining network connection or imposition of high connection charges –High balancing charges de facto favour supply affiliates

11. Incentives to invest Insufficient unbundling (vertical integration) reduces incentives to invest –Investments are only made when they are in the interest of the affiliated supply business Network expansions are delayed and dimensioned to serve own needs Network investments are vital for competition and security of supply

12. Remedies Aim –Creation of integrated gas and electricity markets with effective competition Tools –Application of competition rules in individual cases Possible remedies to identified infringements: –Prohibitions (with fines) –Behavioural remedies –Structural remedies (including break-up) –Infringement procedures against Member States –Regulatory measures

13. The follow-up DG COMP inspections in May/June and December 2006 Commission Energy Package –Adopted on 10 January 2007 –Proposals in July 2007

14. Main content of Energy Package Further unbundling (separation of networks and production/supply) Enhanced powers of Regulators Better coordination between regulators Better coordination between network operators

15. Application of competition rules Identified problem must translate into: –Anti-competitive agreements –Abuse of dominance Examples: –Collusion –Foreclosure Hoarding of capacity, i.e. not releasing unused capacity to the market Failure to invest in network to protect supply business Long-term contracts

16. Analytical framework –Level of concentration –Market coverage –Duration –Strategic importance of customers –Countervailing efficiencies