June 18, 2008
The liberalization of Europe's electric and gas markets is taking a rough ride. But a critical compromise to win the backing from France and Germany has emerged, allowing those utilities to keep their distribution units within the corporate confines.
A more competitive and efficient utility system would subsequently help consumers of all sizes. While such reform does have the potential to give all such energy customers better options, history has shown that the process must be carefully watched and reviewed to ensure that it is open, honest and fair.
The European Union's (EU) Commission has long held the view that that tight ownership of the transmission and distribution infrastructure lends itself to companies favoring their generation supplies over those offered by alternative providers. And besides inhibiting competition, it also says that it discourages investment because only a small percentage of the "congestion revenue" is reinvested in increasing capacity.
Leaders there have that said the current situation in which companies must separate their transmission and distribution from generation -- and have the wires run by a subsidiary -- has not worked. The goal is to break down barriers. EU regulators assert that the $60 billion utility market there is rife with inefficiencies and that open markets would accrue to the benefit of commercial, industrial and residential customers.
Europe's largest integrated utilities, however, take a different view. France and Germany, which host Electricite de France and RWE and E.ON, respectively, say that the current system is effective when it comes to servicing their own constituents. They have argued that "legal" unbundling -- the current situation -- is preferable to forced sales.
A compromise recently reached sets out to accommodate both EU regulators and the vertically integrated utilities. To appeal to France and Germany, the commission will allow their utilities to own their pipelines and transmission grids. But that infrastructure must be managed by independent transmission operators that will allow free access to their systems and preside over investment decisions.
Without the give-and-take, liberalization there would stall. France is set to lead the commission and it would certainly not push an agenda that forced its domestic enterprises to sell off key assets. The general consensus is that the deal just consummated will allow all suppliers, particular those that specialize in green energy, have access to wires and pipes. That could help avoid interruptions in power or gas supplies.
The arrangement, which must independently reviewed in 2010, is "a major step towards a truly integrated European energy market, and the right European Union response to the structural challenges we face," says EU Commission President Jose Manuel Barroso, who adds the pact should be ratified by the EU Parliament by year-end.
Persistence Pays
It's not easy to re-regulate a major portion of the economy. Besides penetrating a market that is dominated by the most powerful companies, newcomers are further penalized because of an inadequate infrastructure to move power and gas between countries and because many of the more lucrative deals are currently locked up in long-term contracts.
While the EU has an enforcement mechanism to bring about compliance, it's still tough to dislodge national interests when it comes to protecting their own energy markets. Indeed, EU regulators are fighting a pervasive attitude -- one that wants to protect national interests while at the same time take advantage of increased opportunities abroad. For example, critics say that it is still difficult for outsiders to invest in France and Germany's energy sector, even though the two have been bidding on foreign interests.
"The issue of ownership is extremely important in Germany. We do not want things determined by the European Union," says German Energy Minister Michael Glos, who calls any forced sale of utility-owned assets "expropriation." Vertically integrated utilities have the capital needed to build-out vital infrastructure, he adds, in a public statement.
Those concerns have not been overlooked by ratings agencies. They note that liberalization causes market volatility and the subsequent risks may affect investment levels, particularly in generation assets. Beyond the typical market fluctuations, fuel prices are now sky-high while national energy policies are still being determined.
The EU had been working on liberalization for many years and passed laws in 1996 and 1998 to ensure that each country followed a course to open its markets. Under the plan, commercial and industrial customers have been able to choose their electric and gas suppliers since July 2004 while residential ones have had the opportunity to select their provider since July 2007. In May 1999, Great Britain became the first European country to allow both its electric and gas consumers a choice of supplier.
"We have moved a long way towards an internal energy market in the EU over the last 10 years," says EU Energy Commissioner Andris Piebalgs. "It is now time to complete this process and ensure that the benefits of this market are real, effective and available to each and every person and company. The EU now has to take the necessary steps to ensure that all its citizens can choose their own supplier."
A patchwork of national laws that inherently favor domestically-controlled industries is not good for competition. The EU, in fact, estimates that resulting inefficiencies -- the effective denial of alternative energy providers to grids and pipelines -- are costing $15 billion a year in lost opportunities. The liberalization process may be fraught with potholes, but EU ministers are convinced that consumers will ultimately benefit through lower costs and more choices.
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