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À l’heure où la Commission a rendu publiques les premières conclusions de son enquête sectorielle sur les mécanismes de capacité lancée il y a un peu plus d’un an, et où elle a engagé une réflexion sur la définition d’une nouvelle organisation des marchés de l’électricité, il est nécessaire de s’interroger sur le rôle du contrôle des aides d’État comme instrument de politique énergétique européenne.

Published version of EUI RSCAS WP 2012/71

Market Building through Antitrust investigates the role of antitrust policy in the building of competitive energy markets in Europe. By looking at the specific problem of long-term supply and access contracts in the electricity sector, the book questions the suitability of antitrust policy as a market building tool. It shows that the institutional infrastructure that pre-dated competitive reform and the politics of liberalization have largely shaped the current dynamics at work in European energy regulatory practice. In particular, antitrust law has increasingly been used as a quasi-ex ante regulatory tool, thereby raising problems in terms of economic efficiency, legal certainty and political legitimacy. By mixing legal, political and economic perspectives, this book will appeal to a wide range of readers from academia in law, economics and political science, regulatory and competition authorities, as well as legal and consulting practices and business economists. -- 1. The Problem of Long-term Contracts in Decentralized Electricity Markets: An Economic Perspective -- Vertical De-integration and Single Market Integration in the European Union: An Incomplete Transition -- 3. The Strategy of the European Commission on Long-term Contracts: Is the New Methodology truly ‘More Economic’? -- 4. Long-term Contracts Across Member States: The Problem of Priority Access Rights to Interconnectors -- 5. The Strategy of the European Community for the Development of Interconnectors: Assessing the Role of Merchant Transmission Investment with Vincent Rious

The Third Package allows EU energy islands to be exempted from most if not all of the acquis communautaire in energy, both on market design and the regulatory framework. However, even if a supply monopoly is the most efficient market structure in a given situation, this monopoly in theory still needs to be regulated. Therefore, has the EU struck the right balance in this area? This paper first disentangles the complex system of derogations open to EU energy islands. It focuses inter alia on the unbundling regime and what it means to have an express derogation from Article 9 (ownership unbundling). The second part looks at the opening of the Cyprus gas market and the concrete effects of the derogation system on the powers of the Cyprus Energy Regulatory Authority, the national regulator, in monitoring this market. Cyprus is considered to be both an isolated (Article 49(1) of Directive 2009/73) and an emergent (Article 49(2) of Directive 2009/73) market under the new legislation and, as such, is an interesting case. The paper argues that, beyond the complexity of the derogation regime applying to energy islands, the scope of possible derogations from the Third Energy Package seems to be exceedingly wide. The Package allows for full vertical reintegration and a loss in regulatory independence and powers which does not seem justified. The Third Energy Package’s derogation system for energy islands should, strictly, be used to ensure the viability and attractiveness of the investments and, in particular, should not reduce the role, power and responsibilities of the national regulatory authority, especially on the issues of security of supply, transparency and consumer protection through the proper regulation of tariffs, bearing in mind that the market will be monopolistic.

The chapter is a revised version of EUI WP; RSCAS; 2011/09; Loyola de Palacio Programme on Energy Policy

Chapter in book. This book fills a gap in the existing literature by dealing with several issues linked to long-term contracts and the efficiency of electricity markets. These include the impact of long-term contracts and vertical integration on effective competition, generation investment in risky markets, and the challenges for competition policy principles.

This paper first reviews some of the main contributions of the new institutional economics to the analysis of the process of competitive transformation of network industries. It shows that neoinstitutional analysis is complementary to the microeconomics of rational pricing, since it accounts for the decisive role of an institutional framework adapted to new transactions. It emphasizes the importance of the political reform process, which draws on the conditions of attractiveness and feasibility to define an initial reorganization of property rights in these industries. The paper then analyzes in this light some of the main challenges ahead for electricity regulation: the question of investment in generation capacities and the link to long term contracts, the regulation of wholesale market power, the support to Renewable Energy Sources for Electricity (RES-E) and the design of new regulatory authorities.

This publication is based on research carried out in the frame work of the Florence School of Regulation of the Robert Schuman Centre for Advanced Studies, European University Institute. The recent Svenska Kraftnät case has shown that even ownership-unbundled TSOs pursuing non-economic goals can feel the cold wind of EU competition law.

This paper aims to assess the emerging strategy of the European Commission on long-term supply contracts in the light of the recent modernisation of EU competition law, in particular with regard to the so-called ‘more economic’ approach. In short, the modernisation aimed at implementing a ‘more economic’ approach based on long-term consumer welfare, which meant gradually shifting from a more (allegedly) legal ‘forms-based’ analysis of contracts to a more ‘effect-based’ approach where the real economic effects of competitive behaviours become more important than the drafting of contracts. The analysis of the recent line of cases shows that a multiple-step approach to analyze long-term supply contract under the competition rules is currently emerging. Among these steps, the economic accuracy and the potential in terms of predictability has been found to diverge widely. The analysis of these steps evidenced that the ‘more economic’ approach should not be interpreted solely as an attempt to integrate more economic analysis but rather as an attempt to better conciliate economic analysis, predictability and the limitation of regulatory costs.

This chapter aims to analysis the new dynamics at work in EU energy regulation. Since the publication of the European Commission’s ‘Sector Inquiry Report’ in January 2007, European energy companies have felt the cold wind of competition law - many for the first time. In addition, national competition authorities (NCAs) have been actively pursuing abusive market practices - sometimes making innovative use of competition law in the process. Certain energy giants have agreed to unbundle their transmission networks - even when their national governments opposed the inclusion of ownership unbundling in the draft ‘Third Package’ of electricity and gas legislation. In parallel, the Third Package envisages the creation of a new regulatory agency - ACER - to co-ordinate technical crossborder regulatory issues in the internal market. So who will be in the driving seat in the next decade - and will co-ordinated regulatory powers be the preferred approach to market design? Will regulatory rules co-exist alongside competition based controls or will the latter gradually supersede the former? This chapter will examine these critical issues.

Loyola de Palacio Programme on Energy Policy European energy policy is characterized by a complex allocation of authority between the European Union and its Member States which results in an intricate interplay of regulatory competence. Knowing the difficulties European countries face in coordinating and proposing common solutions in the area of energy, there is the urgent need to question the legal foundations underlying the decisionmaking process. Institutional paralysis, low reactivity to events and changes as well as systematic political horse-trading across all questions call for an alternative framework allowing some pioneering Member States to promote ad hoc common policies escaping the formal and procedural requirements of EU law. Our paper assesses the legal feasibility of short-run differentiation by means of partial international agreements inspired by the Schengen regime, namely entirely outside the EU framework. The key challenge from a legal point of view is to assess the substantive compatibility of such agreements in energy with the existing rules of the Union. Short run differentiation in energy cannot indeed be assessed at a high level of generalities. We therefore take two areas where legally-binding coordination at the sub-Union level is often called for: nuclear policy and gas security of supply. The possible substantive content of such cooperation is derived from the economic and political literature before legal feasibility is assessed. Our findings suggest that the scope for such agreements is limited for security of gas supply whereas it could be an improved cooperation device in certain areas of nuclear policy.

Summary and Conclusions of the workshop organized by the Loyola de Palacio Programme of the European University Institute and Gis Larsen, 15-16 January 2009, European University Institute, Florence, Italy.

Long-term supply contracts often have ambiguous effects on the competitive structure, investment and consumer welfare in the long term. In a context of market building, these effects are likely to be worsened and thus even harder to assess. Since liberalization and especially since the release of the Energy Sector Enquiry in early 2007, the portfolio of long-term supply contracts of the former incumbents have become a priority for review by the European Commission and the national competition authorities. It is widely believed that European Competition authorities take a dogmatic view on these contracts and systemically emphasize the risk of foreclosure over their positive effects on investment and operation. This paper depicts the methodology that has emerged in the recent line of cases and argues that this interpretation is largely misguided. It shows that a multiple-step approach is used to reduce regulation costs and balance anti-competitive effects with potential efficiency gains. However, if an economic approach is now clearly implemented, competition policy is constrained by the procedural aspect of the legal process and the remedies imposed remain open for discussion.

Following the grant of exemptions from the EC rules on third party access to the interconnectors BritNed, Estlink and East West Cables, the regulation of merchant transmission investment has become an important issue in the electricity sector. The creation of a new Agency for the Cooperation of Energy Regulators (ACER), which will enjoy decision powers on this issue, is therefore a unique occasion to question and maybe re-design the current strategy. This paper shows that the recent decisions evidence a strong bias against dominant generators and that incumbent or new entrant TSOs are generally favoured by European regulators and the European Commission. It argues that this strategy is misguided as it fails to recognize both the conflict of interest between the regulated and non-regulated activities of incumbent TSOs and the new incentives of generators. The opportunity to let dominant generators undertake merchant investment is then investigated and we find that it is generally welfare-improving as long as potential abuses of dominance can be mitigated. To deter possible anti-competitive effects, the paper proposes a new and feasible allocation of regulatory powers based on a clear demarcation between the monitoring of transparency requirements by ACER and antitrust enforcement by the European Commission.

International audience

International audience; This paper evaluates regulatory uncertainty and inefficiency that may prevent merchant transmission investors from committing in Europe, in particular when they are dominant generators. We argue that market players may perceive regulatory uncertainty to acquire exemption on merchant line mainly because of the discretion given for the application of Art. 7 of the Regulation 1228/2003 on cross-border exchanges. However we show that an emerging strategy of the European Commission for granting exemption on merchant transmission line can be eventually derived from recent legal and regulatory proceedings. It mainly consists in relying on TSOs to build merchant lines. We demonstrate that this strategy is neither a first best nor a second best given imperfect unbundling and the current flows in the allocation of regulatory powers. Indeed, it prevents merchant line investment by dominant generators with low generation cost while they have currently more incentive than TSOs to build merchant lines. Since unregulated merchant transmission investment by generators would be problematic, we show eventually that the current strategy of the application of Regulation can easily be fine-tuned to reach this second-best optimum.