“We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success – only then can societies remain economically alive, dynamic, progressive, and free. Trust the people. This is the one irrefutable lesson of the entire postwar period contradicting the notion that rigid government controls are essential to economic development.”1
When the German energy market was opened in 1998, this event was connected with numerous expectations for a plurality of suppliers in the market, better supply of custom-ers and, overall, lower prices for them.2 After decades of dominance of trusts and cartels
1 Ronald Regan, 40th President of the United States of America (1981-1989). September 29th, 1981.
2 Peter Becker, Aufstieg und Krise der deutschen Stromkonzerne: Zugleich ein Beitrag zur Entwicklung des Energierechts (Bochum: Ponte Press, 2010), 78.
in the German energy market, almost not interrupted or even supported by government regulation, the directive concerning common rules for the internal market in electricity of the European Parliament from 19963 was expected to break the market power of the es-tablished companies and introduce competition in the crucial markets for power genera-tion, transmission and distribution.
Yet, the years to follow the liberalization showed with huge clarity that the trusts were not willing to give up their dominant position in this profitable market without opposition. Their traditional and well-cultivated linkages with the political decision makers allowed them to influence legislation in their interest and keep their dominant position in the market.4 In particular, the creation of the European Energy Exchange (EEX) in 2002 was an appreci-ated opportunity for the trusts to control the development of power prices in their interest.5
As a result, the German Federal Cartel Office (FCO) states in its 2011 sector inquiry on the power generation and power wholesale markets in Germany, that the competitive environment on the market for first-time sale of electricity is still dissatisfactory.6 The office was investigating price manipulations at the EEX through physical as well as financial capacity retentions by the four trusts in the German energy market: E.ON, RWE, Vattenfall and EnBW. Several indications had been suggesting that the oligopoly firms were abusing their market power to charge prices above their marginal cost of production to the detri-ment of the consumers.7 Yet, in spite of a huge data collection and evidence found for excessive prices at the stock exchange, the office was incapable to prove manipulations.
Before, already the European Commission failed in proving manipulations in a 2007 ex-amination – it ended with commitments of the huge suppliers instead of sanctions.8
In similar cases concerning complex circumstances in capital markets, e.g. the German case Volkswagen/Porsche in 20089, the authorities did also face huge difficulties to prove manipulations. Apparently, there are cases in the field of the antitrust and capital market manipulation offenses that are most probably punishable – but where the actual
3 European Parliament and European Council, Directive concerning common rules for the internal market in electricity, N° 96/92/EC from December 19th 1996. The directive was transposed into German law with the law on the energy industry [Energiewirtschaftsgesetz (EnWG)], from April 29th 1998, BGBl. I 730.
4 Peter Becker, Aufstieg und Krise der deutschen Stromkonzerne: Zugleich ein Beitrag zur Entwicklung des Energierechts (Bochum: Ponte Press, 2010), 78.
5 Ibid.
6 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 284.
7 Becker, Aufstieg und Krise der deutschen Stromkonzerne: Zugleich ein Beitrag zur Entwicklung des Energierechts (Bochum: Ponte Press, 2010), 78.
8 Commission of the European Communities, Commission staff working document, COM(2006) 851 final, 142 Ref. 428.
9 Möllers, “Die juristische Aufarbeitung der Übernahmeschlacht VW-Porsche – ein Überblick”, NZG Vol. 17, no.
10 (2014), 363.
ment of a sanction fails in practice due to a lack of prove. Such shortcomings in enforce-ment do, however, diminish the deterrent effect of any prohibition. This work will hence treat the question how the legal framework may be adapted in order to effectively deter infringements of the manipulation offenses. The central proposition that will be devel-oped for this purpose in the following chapters is the following:
The system of sanctions needs to be revised in a way that it creates repercus-sions on the offense such that an infringement of the ban on manipulations be-comes unattractive for market participants already from an ex ante perspective.
This proposition will be developed using the allegations of market manipulations at the European Energy Exchange (EEX) as an example. This prominent case is well suited for an exemplary treatment of the shortcomings in enforcement in complex manipulation cases due to the comprehensive data available. In a first step, it will be shown that the current design of the regulatory framework creates incentives for market participants to engage in market manipulations. This proposition is supported using data from the FCO´s and European Commission´s investigations as well as a model from industrial organiza-tion. It will also be shown that in practice, authorities do lack effective instruments to prove manipulations in cases like this. On the basis of these findings, the work will con-centrate on regulatory strategies that are suited to bring about positive behavioral effects impacting the market participants´ behavior pursuant to the regulator´s goals in a second step. The incentive system needs to be changed in such a way that manipulating the market is no longer an attractive option for actors, but are avoided due to the deterrent legal framework. The most promising approach recommended in this work is a reform of the system of sanctions and, subsequently, a change of paradigm in the FCO treatment of abuse of market power:
▪ Instead of the sole focus on increasing government fines for infringements, a turn towards measures that increase the probability of detection of infringements, and
▪ an efficient combination of available instruments of public and private market supervision are likely to result in a higher deterrent effect than the current legal framework.
The main theses for the analysis will be presented in the next section B., followed by a description of the methodology used – the economic analysis of law – in section C. and an overview of the essential characteristics of the German energy market and the legal situ-ation in Germany and the European Union (section D.). Section F. Summarizes the results of the first chapter.
The second chapter of the work introduces the economic and legal basics shaping the exemplary case of allegations of market manipulations at the EEX. The potential manipu-lation strategies of the trusts at the EEX are discussed and subsumed under German and EU competition law. Subsequently, the obstacles to proving the suspicions of manipula-tions for competition authorities will be demonstrated. In the case at hand, such short-comings in enforcement did – in spite of a number of strong indications – result in no sanction for the allegations of manipulations. The fact that an infringement of the manip-ulation offense was probable is shown using a model of industrial organization. The chapter closes with the finding that the current legal framework, in spite of its regulatory density, provides incentives for actors to manipulate the market.
A behavioral impact on actors that makes manipulating the market unattractive to them may be reached with an efficient system of market surveillance both publicly and privately as it is introduced in the third and fourth chapters of this work. The third chapter starts with a comprehensive economic and legal analysis that shows that the authorities´ current focus on tremendous fines does not only lead to an ineffective deterrence of manipulations, but also infringes European and German constitutional law. The work does hence propose legal instruments that increase the probability of detection of market manipulations. It is only on this way that the necessary impact on the market participants´ behavior may be reached.
The following fourth chapter does furthermore treat strategies of private market surveil-lance that may increase deterrence of market manipulations if designed appropriately – namely damages claims of injured parties.
As a result of the preceding analysis, the fifth chapter examines conflicts of objectives between the different regulatory approaches discussed and develops a new regulatory approach for the treatment of market manipulations: An integrated system of market sur-veillance. This approach promises an impact on the market actors´ behavior that avoids manipulations and is hence superior to the currently practiced, fragmented regulatory system.
The final sixth chapter summarizes the results.