UK: Decisions that will help crack the energy iceberg - EC Restrictions.

UK: Decisions that will help crack the energy iceberg - EC Restrictions. - The protectionist giants are feeling the effects of new EC restrictions.

by Peter Wilsher.
Last Updated: 31 Aug 2010

The protectionist giants are feeling the effects of new EC restrictions.

Despite the blinkered beliefs of Britain's Eurosceptics, Brussels is not always concerned only with the obscure nooks and crannies of economic life. Indeed, even while the Maastricht debate has been distracting everyone's attention, Commission officials have embarked on what is likely to prove one of their most significant and bitterly contested battles, and one where this not always very United Kingdom of ours has the greatest possible interest in seeing them succeed. After many years of high-level procrastination they have moved at last to inject some real competition into the stubbornly protected markets for electricity and gas.

This is certainly no arcane affair affecting just a few specialised widget-makers in Nether Calabria. Electricity sales in the Community are running at £110 billion a year, with gas not far behind at £83 billion, and their costs in some way enter into every form of human activity. Large industrial users, in particular, are convinced they are far too high, and kept that way (usually with wholehearted state connivance) by a set of cosy institutional barriers designed to minimise any freedom in choice of suppliers. With a bit of luck, though, these are set to come under progressively more intensive attack.

Thanks to privatisation, the UK has already gone quite a long way down this road (though the continual trench warfare that goes on between British Gas, the power generators and distributors and their respective regulators is an indicator of just how tough and sustained opposition is likely to be). But elsewhere on the Continent the process has scarcely begun. To the vast, mainly state-owned monopolies that control the non-oil elements of the energy sector, competition remains something that happens to other people.

A year ago, however, the EC energy commission, headed by Portugal's Antonio Cardoso e Cunha, proposed far-reaching legislation which may belatedly force them to shake up their ideas. Its key effects, if accepted, would be to encourage the entry of significant and powerful new producers and provide them with mandatory access to existing pipelines and electricity grids. So far this has been resisted and pooh-poohed by the established utility groups (which are, of course, among Europe's most powerfully entrenched industrial institutions) and greeted with lukewarm enthusiasm by most of the governments concerned. Now though, Sir Leon Brittan, the EC's most pugnacious trustbuster, has indicated that he has both the powers and the determination to make something happen. His hand is likely to be further strengthened this year, as European energy ministers come under increasing pressure from both recession-strapped manufacturers and domestic consumers to "do whatever they can" about reducing energy charges.

Recently two small but potential explosive decisions have shown that it is possible to start cracking the energy iceberg. Two of the haughtiest and most intransigent monopolists, Electricite de France (EDF) and Germany's Ruhrgas, have each been forced to accept a precedent-setting defeat.

In the French case, the actual issue was almost laughably specialised and obscure. Societe Hydroelectrique de Grangevielle is a small, private company operating high in the French Alps, almost on the line of the Italian frontier. The only sensible customer for the power it produces is the local Italian distributor, whose territory starts just two kilometres away. But, under existing regulations it was forbidden to conclude any direct arrangement. It was forced to use EDF as a middleman, and as a result to accept a price per unit which was just half what the Italians were perfectly willing to pay.

Understandably this left the SHG management pretty unhappy. Two years ago they complained to Sir Leon's investigators that they were being ridiculously penalised by a quirk of historical geography. When their 10 million kilowatt-hours a year plant was originally planned it was actually in Italy, cut off from France's electricity grid (as it still is) by a range of 12,000-ft mountains. Unfortunately it then fell victim to a bit of localised post-World War II frontier straightening, since when its isolation has provided no protection whatever against the workings of the EDF monopoly rules.

The most onerous of these, in the circumstances, has been the requirement that every unit of electricity produced within France's borders must be sold to EDF at not more than the going national rate of 20 centimes, irrespective of what anyone else may be ready to offer just a few hundred yards down the road. After an intensive enquiry, consuming hundreds of hours of managerial and legal arguments, Brussels has reached one of its more Solomon-like judgements. EDF will, for the moment, retain its role as mandatory selling agent. But the price it pays will match the Italians' 40 centimes. Honour is satisfied and, for the first time, an exploitable crevice has been found in the monopoly's previously impregnable defences. Only time will tell if this is enough to start a breach in the wall.

But perhaps even more significant as a setter of precedents and a definer of competition philosophy is the recent ruling by Germany's Federal Cartel Office on access to natural gas pipelines.

Ruhrgas, which exercises a formidable degree of domination over German energy supplies, is the largest shareholder in VNG, which owns, among other things, a large gas transmission network in East Germany. Soon after the collapse of Soviet control in eastern Europe, it was approached by a group planning to pipe Russian gas through Czechoslovakia with a view to selling it in the always gas-hungry German market. But VNG refused even to enter into negotiations. It had decided, unilaterally and "on principle", it said, that no one really wanted what this interloper was proposing to offer.

That refusal has now been comprehensively condemned by the Federal cartel authorities as "an abuse of a dominant position" and therefore unacceptable. Subject to VNG's pained and indignant appeal, which is now grinding its torturous way through the German courts, they are insisting that talks be re-opened, and their reading of the law is enthusiastically endorsed by the Brittan team in Brussels. "In our view, in certain circumstances, the refusal of third party access is certainly an abuse," says Claus-Diere Ehlermann, who heads the competition office. It is a key which he hopes will ultimately open many other stoutly defended doors.

However, the real test will come when the negotiations break down, say, over some irreconcilable difference on contractual terms - and the regulators have to decide whether or not the obstacles are solid enough to block the deal. But at least there is now some determination visible to take on the protectionist giants.

Peter Wilsher is a freelance consultant and writer.

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