Examination of Witnesses (Questions 545-559)
DG COMPETITION, EUROPEAN
COMMISSION
22 FEBRUARY 2005
Q545 Chairman: Good morning, Mr Lowe.
May we welcome you here this morning. I think this is probably
the first time we have had the opportunity to take evidence from
a Brussels official in London. We are very grateful to you for
taking the trouble to come across. We have become increasingly
conscious of the European dimension in the whole issue of energy
prices and the spikes which we have experienced and the fact that
there has been what you might call a Europeanisation of the British
energy market certainly in relation to price. You will be aware
that Ofgem, which I think is now chaired by your predecessor,
Sir John Mogg, that is to say of DG Competition, said in their
report into price rises for wholesale gas in the UK during 2003-04
that they were concerned about whether the slow pace of liberalisation
of the Continental gas markets was creating difficulty for the
UK market. I know that Ofgem has asked you to carry out an investigation
into this. What is the status of this request for an investigation?
Where are we at the moment? Is the Commission, with its new personnel,
seizing the initiative here?
Mr Lowe: Thank you for this invitation.
I am very pleased to give evidence to this Committee. Sir John
Mogg was the former Director General of the Internal Market. As
far as the energy markets are concerned, that is electricity and
gas, it is fair to say that the Commission's overall view from
all departments is that, after five years of efforts to introduce
competition for electricity and three years for gas, in terms
of implementation of initial Directives, there has been very slow
progress. In particular, this new Commission, under Mr Barroso
and my own commissioner, Neelie Kroes and Mr Piebalgs, who is
the Energy Commissioner, is aware that we should make any effort
we can to identify the causes of this lack of progress and also
to launch investigations under the competition rules which allow
us to follow up an investigation in such a way that we can, for
example, take action against any infringement of antitrust law
or reflect what the conclusions are in merger policy or in state
aid policy. All of those instruments are relevant to accompanying
the process of liberalisation across the European Union in a way
that will allow the Directives to be implemented in an effective
way. That being said, the first obstacle to effective competition
in the energy markets is the implementation of the Directives
themselves, the application into law. As you are probably aware,
10 Member States of the European Union have still not implemented
or transcribed into national law the existing Directives. There
is also a proposed regulation on access to gas networks which
is before Council and Parliament at the moment and we expect it
to be operational from July of this year. Therefore, we entered
into the initiative of a competition investigation in this area
in the hope that there will be a corresponding commitment by Member
State governments to implementation of the commitments which they
have already entered into. As far as the investigation which we
planned is concerned, you have no doubt seen that this new Commission
is dedicated to a more competitive Europe. It has been clear from
the Neelie Kroes' declaration before the European Parliament that
she believes that the provision of competitive energy is one vital
component to that. Despite the way forward shown by the UK and
in some other Member States, there is a lot to be done in order
to kick-start competition in a number of the aspects of the electricity
and gas markets. We propose to launch an investigation starting
in May of this year which requires a combined decision of the
Competition Commissioner and the Energy Commissioner. We hope
it will lead to some preliminary results at the end of 2005 and
the final results will be made available in 2006. We do not intend
to tackle all problems in the sectors. However, there are some
patent ones. There is a clear lack of market interpenetration
in terms of cross-border access; there is necessarily an influence
of the markets structure in many Member States with single suppliers
still dominating the scene; and there is the structure of the
long-term contracts which exist in many areas, long-term contracts
which have the effect in our view of foreclosing competition on
markets which should be developing. We have tackled those recently
in antitrust cases where we have asked for, for example, restrictive
clauses on territorial destinations to be removed, but we are
only scratching at the surface and we believe that there a lot
more will be required in order to make sure that the networks
are easily accessed, that problems of storage are dealt with as
well as transmission and that questions of management of networks
are effectively dealt with, balancing as well as tariffication.
As you probably have read, if you wish to transmit gas between
Zeebrugge and Budapest, you have to go through five different
networks with five different tariff structures and five different
systems in management. Therefore, in addition to looking at how
we see the possibilities for bringing competition into individual
and national markets, we also want to make sure that the networks
are effective. So that is the direction of the sectoral review.
It will also cover some aspects of the electricity market. We
will be launching a formal proposal in May. Why May? Chairman,
the reason is that we are committed beforehand to consulting the
national regulators. We now have 25 national regulators in the
European Union plus 25 national competition authorities. They
are all very interested in this investigation because they all,
like you, share concerns of a different kind about the lack of
benefit which is coming from the existing liberalisation proposals.
You may have noticed that the Chairman of the Bundeskartellam
has recently launched an initiative on long-term energy contracts,
setting some guidelines as to how the scope of contracts could
be limited. It is the contribution of competition authorities
such as the Bundeskartellam but also Ofgem and OFT, where
necessary, that we hope will mean we will be able to arrive at
a result which makes sense not just for the Commission, but for
all the national authorities concerned.
Q546 Chairman: That is a very helpful
introduction. You have given us the timeframe. You also said at
the beginning that we have had five years of electricity competition
and three years of gas. In some respects there is not an awful
lot to show for it. If it emerges that some of the national players
and others perhaps have been a bit less than enthusiastic in participating
and have been dragging their feet, do you have any powers to impose
charges on them or fines for wilfully slowing down the process,
or would that clock only start running in the meantime?
Mr Lowe: Under EU law it is possible
for the Commission to take action against a Member State through
the courts in Luxembourg for failure to implement law, whether
it is a Directive or a regulation. That is a long process and
the fines which may indeed sometimes be appropriate in those circumstances
create some degree of tension, but the most important thing in
the Commission's view is that the facts should be laid out before
the Member States clearly in public so that, even if we do have
to use legal means vis-a"-vis the Member States, the public
debate on the lack of progress puts pressure on them. As far as
private operators are concerned, we have the powers to launch
a formal inquiry under Regulation 1 of the competition area. I
hope you do not mind me using that slightly bureaucratic expression;
it sounds like a battleship. Under Regulation 1/2003, we are allowed
to launch an inquiry with obligatory powers of response from operators,
but unlike the UK law in this respect, we are not allowed, as
a result of that investigation, immediately to impose remedies
on private parties. In respect of due process, we have to launch
investigations with respect to private undertakings based upon
a separate inquiry which may be triggered by the investigation.
But our inquiry into their violation of competition law cannot
start with the information in the investigation itself. It must
be triggered by it. There could be cartel-like behaviour in some
instances. We have taken action already against some undertakings
who have deliberately inserted clauses to avoid competition taking
place in the margins of the contracts which they have signed with
their clients. In many cases, those clauses were aimed at ensuring
that, for example, gas delivered could not be resold if it was
not required. This kind of violation is almost a per se
violation of antitrust law, but it requires evidence to be prepared
in a proper way and the rights of defence of the undertakings
must be respected. So we are able to follow them up in independent
inquiries and we expect to have to do that. Finally, in the merger
area of course, the recommendations which we expect to come out
of an investigation would go in the direction of ensuring again
that there was no foreclosure of competition through consolidation
in the sector. You may be aware that at the end of last year we
took a negative decision on the proposal for the merger of the
Portuguese gas and electricity monopolies. It may seem rather
normal business to prohibit a merger of two monopolists, but the
argument used by the Portuguese undertakings at the time was that
this would prepare them for the liberalisation of the market,
but as no liberalisation was expected before 2008 and 2009, the
Commission's view was that it would be extremely dangerous to
allow two incumbents to build up their position to such an extent
that there was no prospect of `the cavalry coming over the hill'
to rescue the consumer.
Q547 Chairman: So really what you are
saying is that the instances of a natural monopoly would be one
thing, but a monopoly of the kind you described, which is somewhat
more wide ranging in character, would not be acceptable. The impression
we get from what you are saying is that you have the powers but
it will take rather a long time to implement them, is that right?
Mr Lowe: To be fair, Chairman,
the report which we expect to come from this investigation will
arouse considerable interest throughout the European Union and
in itself can be a tool not just of action by the Commission but
by the national competition authorities and the national regulators.
We hope to be able to time the dimension of this so that we do
produce some initial results at the end of this year and we hope
to make sure that this investigatory phase does not go beyond
a year. You are right to warn us of the need to be expedient.
Q548 Mr Clapham: I want to ask a question
about Ofgem's 2003 analysis. At that time they were unable to
say whether gas companies in mainland Europe had prevented gas
flowing through to the UK despite the fact that gas prices had
increased. Have you done any surveys to determine whether that
is so? Could you say whether there is evidence to show that the
market for gas in 2003 in mainland Europe was not responding properly
or that the gas companies were not responding to the market in
a proper way?
Mr Lowe: We were asked in 2001
to do an investigation into the workings of the Interconnector
in response to similar rigidities. The conclusion on that was
that there was no antitrust behaviour which we could condemn,
although there were excessively rigid rules applied to the reservation
of capacity and the time delays in which capacity could be unblocked
and those rules were changed at the time. Since then my department
has not undertaken an investigation of the kind which Ofgem has
recently engaged in. I will make some preliminary remarks on the
Ofgem results. First of all, you referred to the existence of
a market in Continental Europe. The existence of a market looked
upon from a Member State (the UK) where there is a central balancing
point, where there is effectively gas-to-gas competition, has
to be contrasted against a (Continental) situation in which the
availability of gas in the market is extremely limited in any
event because of the domination of traditional supply arrangements
with importers, traditional supply arrangements under long-term
contracts and the heavy predominance of incumbents, many of whom
are vertically integrated. Therefore, there is bound to be, in
that confrontation of two markets, some degree of volatility.
The marginal gas available will be mainly determined by the constraints
already imposed by the structural factors in the market. Even
if the entire market were liquid, there would still be volatility.
There is some degree of lag between wholesale and retail prices
and there is some degree of adjustment in respect of the use of
gas in relation to alternative sources of energy. It is quite
clear from what we have observed, and what Ofgem has said, that
the events of 2003 give grounds for concern and are symptoms of
the fact, which I have emphasised before, that there is not effective
gas-to-gas competition on the Continent of Europe yet. There is
some progress but it is insufficient. We do need not just to implement
Directives but also to vigorously apply competition rules to the
sector.
Q549 Mr Clapham: Given what you have
just said and bearing in mind that traditional supply arrangements
caused that rigidity, are you confident that they can be removed
within the context of moving to a proper competitive market?
Mr Lowe: We should clearly not
be over-ambitious and unrealistic. However, already in relation
to the antitrust cases which we have been dealing with, we have
been able not just to impose but in many cases persuade suppliers
to remove restrictive clauses. We have also taken a number of
formal decisions in this area, one of which related recently to
the relationship between GDF and Enel to prevent that kind of
restriction. What is the likely course of a sectoral investigation?
It would be to point to practices we would conclude are anti-competitive,
beyond these clauses in contracts—practices which we would
eventually have to take action against. Secondly, it could imply
amendments to regulations and Directives. You know that as far
as the latter situation is concerned the Council and the Parliament
are bound to review the implementation of the Directives in 2006
based upon a report which the Commission is going to present at
the end of the year, and Mr Schmitt von Sydow will be telling
you about that. As far as our own work is concerned, all I can
say is that Neelie Kroes in her hearing before Parliament and
in her public declarations has said that so far as her own department
is concerned, one of the major enforcement priorities will be
to promote a more competitive energy sector and therefore there
is an obligation on me as the senior official in her department
to ensure that resources are available to carry out those investigations.
Q550 Richard Burden: I would just like
to run through who actually is doing what and has done what as
regards existing Directives and so on. You said that there were
10 Member States that so far have not transposed existing energy
Directives into their domestic rules. Am I right about that?
Mr Lowe: Yes. As far as the precise
list of who they are is concerned, I would invite my dear colleague,
Mr Schmitt von Sydow, to reply to that question because he has
the precise list. I would not want to make an error between one
or two of our new Member States.
Q551 Richard Burden: We can ask him about
that later.
Mr Lowe: However, I would like
to point out that one very large Member State to the east of the
European Union has also not implemented the Directive yet.
Q552 Richard Burden: But we do know that
Germany has! What in your view are the most important areas where
Member States still have got to implement Directives? You referred
earlier on to access to infrastructure, but would you say that
would be the priority?
Mr Lowe: It is fair to say—and
I do not want to prejudge what Mr Schmitt von Sydow wants to explain
in this respect—that there are several aspects of the implementation
of the Directives which remain unsatisfactory and a lack of full
unbundling is a major one. That distinction between the management
and ownership of the network on the one hand, and the operators
who are using it on the other, is essential. Also, there is the
lack of capacity for consumers, large and small, to exercise choice
and to ensure that switching arrangements are adequately dealt
with. There is all too often the problem which needs to be addressed
under the regulations of a continuing existence of a regulated
sector alongside a competition sector. I mention those three areas
in which the implementation of the Directives is quite clearly
inadequate. I would just like to emphasise that even if the Directives
were implemented fully, we still depend upon the behaviour of
undertakings to respond to the competitive opportunities and challenges.
Insofar as the market as a whole has not been used to this kind
of environment in any lengthy period, and considering the UK experience
which started a lot earlier, one can expect that this will be
quite a long fight for the competition authorities and the regulators
to ensure that behaviour is adapted.
Q553 Chairman: Is it not a bit disingenuous
to say that every time a liberalised market emerges they have
got to start learning how to invent the wheel? A number of these
companies are international in character and they do have experience
in other countries. We have, for example, a number of German companies
playing quite a major part in our gas and electricity markets
at the moment. It is not quite correct to suggest that they can
say, "We know nothing about this as we come from Germany.
We're not like the Brits," when they are having to go along
with the liberalisation that we have already had, which is not
markedly different from the ultimate outcome Europe-wide would
be, is it?
Mr Lowe: At the wholesale level
there is a very large concentration of operators operating in
the different national markets. Therefore I would fully underscore
what you say, that there is a lot of experience to be gained here
and that the rules of the game should be known.
Q554 Richard Burden: Could you run through
who has got independent regulators and who has not at the present
time?
Mr Lowe: The regulators exist
in all Member States of the European Union and that is one obligation
in the Directives which is being respected. They meet together
in a grouping, which the Commission also takes part in, to assess
performance in relation to benchmarks of what should have been
achieved under the Directives and it is fair to say that that
grouping has been a rather positive force for encouraging competition
in the sector. We also, together with our colleagues in the national
competition authorities, are establishing a much firmer dialogue
with them so that where they believe they cannot act with their
regulatory powers, they would expect us to act. In some countries,
such as the UK, there is a de facto application of the
competition rules in the hands of the regulator rather than the
competition authority. The gas and electricity regulators meet
together under the chairmanship of the Portuguese regulator who
has demonstrated a strong commitment to the liberalisation process.
We held, together with the regulators, an Energy Day in September.
I will also be talking to them next week to identify with them
what they believe to be some of the key issues which may need
to be included in this inquiry. They are measuring the impacts
on competition inside the territories of each Member State and
they expect the Commission to act where there are problems which
go beyond the boundaries of a Member State and where there are
cross-border issues to be addressed. One of them I referred to
earlier, which is the issue of access to cross-border networks,
to what extent the tariffication, the balancing conditions, the
tolerances, allow effective transmission of gas across borders
without difficulty, and there we have a very important role to
play. If the investigation shows that we should be amending or
putting forward new regulation to ensure that this is the case,
then we will have to do it.
Q555 Richard Burden: You said that one
of the functions of the meetings that take place is to benchmark
the performance of the regulators domestically. What is the first
report on that?
Mr Lowe: What is being benchmarked
is the progression of the sector towards a freely competitive
situation. Now, of course, insofar as the performance of one Member
State in that sector is poor, that could be a comment on the regulator,
but it could equally be a comment on the power of the regulator
vis-a"-vis the government or the incumbent operators. One
major problem, as you are aware, is that contrary on the whole
to an independent competition authority—and our competition
authorities generally have shown independence if nothing else—regulators
tend to develop a very close operational relationship with the
incumbents and this has sometimes led to a tolerance of situations
which should not have been tolerated.
Q556 Chairman: Is it your job to check
on the effectiveness of the regulatory systems in each country?
There has been, for example, competitiveness indicators developed.
Do you envisage something of this nature being established for
regulatory bodies?
Mr Lowe: I do not think the Member
States of the European Union like the idea of naming and shaming.
Q557 Chairman: Surely that is one reason
for doing it.
Mr Lowe: Generally speaking, one
of the advantages of the economic entity of the European Union
is precisely the comparison of competitive performance. Insofar
as this new Commission is committed to a more competitive Europe,
then it should be the view, at least of the competition authorities,
to encourage those behaviours which leads to more competition
and benefits to consumers.
Q558 Chairman: Do you think you would
have an index of the degree of regulatory capture?
Mr Lowe: We do not need to have
one, but public opinion could have that view in certain circumstances.
Q559 Mr Evans: I think naming and shaming
could be useful because it is sometimes seen as if Britain is
the bad boy of Europe. It would be useful to know who the bad
boys of Europe are as far as this is concerned. You mentioned
Energy Day. Could you just put a little bit more meat on the bones
of that?
Mr Lowe: Incidentally, on the
issue of positive naming, it is quite clear that the UK experience
in the gas and electricity sector has been regarded as a model
for the rest of Europe. On initiatives like Energy Day, it is
simply that we gather together the representatives of the national
competition authorities, in particular their sectoral experts
and we try to address together some of the combined issues which
we believe are to be tackled in the sector, ie why is the market
not functioning correctly and which kind of behaviours would be
regarded as a priority for us to attack through our casework?
I mentioned earlier the work of the Bundeskartellam energy
sectoral experts. They produce guidance on long-term contracts
and have suggested that no contract for gas should be of a duration
longer than two years if there is exclusivity and should not be
longer than four years if there is 80% reservation of capacity.
This sort of proposal by our colleagues needs to be debated because
we also want to provide some kind of level playing field for energy
operators across Europe and we do not want to be implementing
rules from the Commission or from the OFT or from Ofgem or the
Bundeskartellam which will create confusion. What we are
trying to do with initiatives like this Energy Day which we put
together is to assess where we have got to, what the issues are
and how we are going to tackle them and try and get some harmonised
approach, and that is why we felt it was also necessary to deepen
the dialogue with the sectoral regulators themselves. I attended
with my colleagues a recent seminar with the regulators in Italy
precisely for that purpose and we will be doing that again in
a fortnight.
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