Market power in the primary market for power

B. THE NATURE OF PHYSICAL AND FINANCIAL CAPACITY RETENTION

II. L EGAL CLASSIFICATION OF CAPACITY RETENTION : A NTITRUST

1. Market power in the primary market for power

a) The relevant product market

The identification of market power requires the definition of the relevant market according to the criteria pointed out in Chapter 1.⁴¹¹ With regard to the definition of the relevant product traded, the German antitrust authorities discriminate between the pri-mary market for power (power producers) and the secondary market (sale to end custom-ers).⁴¹² The relevant primary market comprises the first-time sale of the electricity suppli-ers´ own production, as well as net imports of electricity.⁴¹³ Wholesale traders are ex-cluded from this definition, since it focuses on the physical supply of power, which is exclusively determined, by the production and imports.⁴¹⁴ Pure commercial transactions

409 Axel Ockenfels, "Strombörse und Marktmacht," et Vol. 57, no. 5 (2007), 48.

410 See Chapter 1 E. II. of this work for details.

411 See Chapter 1 E.II.1.a) and 2.a).

412 This distinction is made since the 2006 decision of the FCO in the merger prohibition case E.ON/Eschwege and has been confirmed by both the Higher Regional Court (OLG) Düsseldorf and the Federal Court of Justice.

See FCO decision from September 12, 2003. B 8 – Fa – 21/03. Also OLG Düsseldorf, decision from June 6, 2007. VI-2 Kart 7/04 (V) “E.ON/Eschwege”. German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”.

413 German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”, Ref. 15 et sqq.

414 German Federal Court of Justice in “E.ON/Eschwege”, Ref. 18. With reference its decision from October 5^th, 2004. KVR 14/03 “Staubsaugerbeutelmarkt”.

of power stay without influence on the quantity offered in the market. Also, pure transac-tions are unable to exert influence on the competitive situation in the primary market, since wholesale traders need to buy power from the producers respectively importers be-fore they can offer power in the market. Therebe-fore, this group of traders cannot be exam-ined on the same trade level with the producers.⁴¹⁵ As a result, the relevant product mar-ket for the first-time sale of power includes the following commodities:

▪ Actual physical production of power (as opposed to the capacity theoretically avail-able with regard to the existing power stations), and

▪ net total imports of power to Germany.⁴¹⁶

On the European level, the German product market definition has been approved in 2006 by the European Commission in its sector inquiry.⁴¹⁷

In its 2011 sector inquiry, the FCO further defines the German primary electricity market, making two important restrictions: Balancing energy and the production from renewable sources (EEG) are excluded from the market. With regard to balancing energy, the FCO argues that this product aims at capacity provision, whereas the wholesale market is tar-geted on the delivery of power. Furthermore, the demand situation differs from the one found on the wholesale market: Balancing energy is demanded only by the four transmis-sion network operators in Germany, who cover their demand in separate auctions accord-ing to the applicable law.⁴¹⁸ As a result, there is no substitutability for balancing energy products with power from the wholesale market. The European Commission follows the same logic in its decisions.⁴¹⁹

Furthermore, the FCO excludes the production and marketing of power from renewable sources from the primary market for power.⁴²⁰ The Renewable Energy Act (EEG) pre-scribes a necessity for network operators to connect plant operators to the grid and buy

415 German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”, Ref. 19.

416 Summarizing the definition of the market: Federal Cartel Office, Sektoruntersuchung Stro-merzeugung/Stromgroßhandel, N° B10-9/09, 69-70.

417 European Commission, DG Competition, Report on the Energy Sector Inquiry, SEC (2006) 1724, 397 et sqq.

418 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 71 et sqq. The auction requirement is codified in Sec. 22 et sqq. EnWG and Sec. 6 et sqq. StromNZV.

419 European Commission, decisions from November 26, 2008. COMP/39.388 “Deutscher Stromgroßhandels-markt“ and COMP/39.389 “Deutscher RegelenergieStromgroßhandels-markt“.

420 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 73.

their power production at legally fixed rates with priority.⁴²¹ Also the sale of power stem-ming from EEG installations is subject to legal rules in the AusglMechV.⁴²² Therefore, pro-duction of power from renewable sources is independent from demand and the situation on the wholesale market.⁴²³ Indeed does the quantity of EEG power influence the equilib-rium price in the market, since conventional power stations are replaced by cheap EEG power (so-called merit order effect).⁴²⁴ However, the transmission network operators mar-keting the EEG power do not act as competitors in the market, since the system leaves them no room for decisions on quantity and price.⁴²⁵ The EEG amendments from August 2011, in particular the possibility for EEG installation operators to sell their power individ-ually at the exchanges instead of earning the legally guaranteed payment (Sec. 33a to 33i EEG), might change this situation in the future.⁴²⁶ However, the incentives for operators to build energy storages and manage their power feed into the grids in order to optimally market their power at the exchanges are low.⁴²⁷

This argument, however, is not undisputed. Säcker criticizes that competitive effects of the EEG must be considered.⁴²⁸ In the short term, the price-dampening effect of EEG power feed-in (merit-order effect) influences the market participants´ behavior. In the long term, investment decisions depend on the legal framework for EEG power production and feed-in. Säcker points out that even the FCO has admitted an influence of EEG power on the market.⁴²⁹ However, the FCO convincingly demonstrates the lacking liberty of action for network operators in determining price and quantity of EEG power feed-in.⁴³⁰ The mere existence of a competitor, who is, however, not equipped with the very basic liberty to choose quantity and price offered in the market, is not sufficient to justify the claim that EEG power would exert remarkable influence on the competitive situation in the power market.

To date, therefore, the exclusion of power stemming from EEG installations from the rel-evant product market as practiced by the FCO is convincing. Summarizing, the relrel-evant

421 See the explanation in Chapter 1 E.I. for details.

422 Jens-Peter Schneider, Recht der Energiewirtschaft. Praxishandbuch, 3rd ed., ed. Jens-Peter Schneider and Christian Theobald (München: C.H. Beck, 2011), 1233ff.

423 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 73-74.

424 Ben Schlemmermeier, Carsten Diermann, Eyk Bösche, and Tobias Haberland, “Stromgroßhandelsmarkt aus zwei Perspektiven betrachtet: Erzeuger und Vertriebe”, Explorer Markttrends no. 12 (2010), 7.

425 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 73.

426 Florian Valentin, “Das neue System der Direktvermarktung von EEG-Strom im Überblick”, ree Vol. 2, no. 1 (2012), 11.

427 Monopoly Commission, Sondergutachten 59 – Energie 2011: Wettbewerbsentwicklung mit Licht und Schat-ten, 10 Ref. 22.

428 Franz Jürgen Säcker, “Marktabgrenzung, Marktbeherrschung und Markttransparenz auf dem Stromgroß-handelsmarkt”, et Vol. 61, no. 4 (2011), 75.

429 Ibid. With reference to Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N°

B10-9/09, 249 et sqq. and 73.

430 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 73.

product market for power in European and German competition law includes the following products:

▪ Actual physical production of power, and

▪ net total imports of power to Germany.

Excluded from the primary market are:

▪ Balancing energy, and

▪ power stemming from renewable resources (EEG).

b) The relevant geographical market

The relevant geographical market for the first-time sale of power includes the Ger-man territory. Both, GerGer-man courts⁴³¹ and the European Commission⁴³² have confirmed this established practice of the FCO.⁴³³ The main reason for the geographical limitation to Germany is the lack of sufficient cross-border transmission capacity.⁴³⁴ Competition from foreign power producers is therefore limited physically, since no noteworthy quantity can be imported to Germany.⁴³⁵

The FCO makes an exception with regard to Austria. In the years from 2007 to 2009, all cross-border transactions could be carried out, congestions were not observed.⁴³⁶ With regard to power trade, the FCO points out that the EEX has become the leading exchange for Austria, furthermore, there is just one EPEX day-ahead price for both countries.⁴³⁷ The German Monopoly Commission supports the FCO opinion⁴³⁸. However, a recent analysis of

431 OLG Düsseldorf, decision from June 6, 2007. VI-2 Kart 7/04 (V) “E.ON/Eschwege”. German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”.

432 European Commission, decisions from November 26, 2008. COMP/39.388 “Deutscher Stromgroßhandels-markt“ and COMP/39.389 „Deutscher RegelenergieStromgroßhandels-markt“. See also Commission of the European Communities, Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report), SEC(2006) 1724, 5.

433 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 74.

434 For a comprehensive analysis of the current situation, see Nina Vrana, Interkonnektoren im Europäischen Binnenmarkt (Baden-Baden: Nomos Verlagsgesellschaft, 2012). See also Commission of the European Com-munities, Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report), SEC(2006) 1724, 6.

435 German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”, Ref. 22.

436 Monopoly Commission, Sondergutachten 54 – Strom und Gas 2009: Energiemärkte im Spannungsfeld zwi-schen Politik und Wettbewerb, 25 Ref. 48.

437 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 78.

438 Monopoly Commission, Sondergutachten 59 – Energie 2011: Wettbewerbsentwicklung mit Licht und Schat-ten, 6 Ref. 10.

the electricity wholesale sector suggests that in particular with regard to the coupled mar-kets with the Netherlands, Belgium, and France, Germany is sufficiently interconnected.⁴³⁹ Yet, the study has been conducted as an ex-post analysis and using a static system with restrictive assumptions that are frequently disproved by practical observations.⁴⁴⁰ The findings of the ESMT study can therefore not serve as proof of an European integrated wholesale market, as the FCO correctly claims. In conclusion, the relevant geographical market for first time power sale includes Germany and Austria.⁴⁴¹

c) Dominance of the power market

The definition of the relevant product and geographic market conducted in the pre-ceding chapter is the relevant point of reference for the examination of market dominance in the wholesale market. In the German power market, two forms of market power have to be discussed:

▪ The existence of a dominant oligopoly by the four established producers E.ON, RWE, EnBW, and Vattenfall or a subset of this group, and

▪ a possible dominance by each of the four firms solitarily.

As already outlined in the first chapter, dominance in the light of European and German antitrust laws refers to a position that enables firms to behave independently of their competitors and exert perceptible influence on the market output level and price.⁴⁴² The following subsections will elaborate the indicators for the two cases of collective and indi-vidual dominance and judge whether the oligopoly firms and/or the indiindi-vidual firms needed to be considered as dominant in the wholesale market during the time horizon of this examination (2004 to 2009).

aa) Collective market dominance – the oligopoly case (Sec. 19(2) GWB)

Sec. 18(5) GWB stipulates that two or more firms may be collectively dominant on a market if

439 ESMT, The Electricity Wholesale Sector: Market Integration and Competition. Study from January 13, 2010, 21. Available at www.esmt.org/en/271646.

440 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 85-86.

441 This finding has recently been confirmed: Monopoly Commission, Sondergutachten 71 - Energie 2015: Ein wettbewerbliches Marktdesign für die Energiewende, 2015, 30 Ref. 48.

442 For the European Court of Justice definition of market dominance, please refer back to Chapter 1 E.II.1.a).

(1) no substantial competition exists between them with respect to certain kinds of goods or commercial services, and

(2) they comply in their entirety with the requirements of paragraph 1, which states that firms are without competitors or in a paramount market position.⁴⁴³

Sec. 18(6) N° 1 GWB contains a presumption for market dominance if three or less un-dertakings reach a combined market share of at least 50 percent. For five or fewer under-takings, the threshold for the presumption of dominance is at two-thirds, Sec. 18(6) N° 6 GWB.

Concerning the German power market, European⁴⁴⁴ and German⁴⁴⁵ court decisions have already come to the conclusion that at least a duopoly consisting of E.ON and RWE domi-nated the wholesale market. In 2008, the European Commission even suggested that three companies, namely E.ON, RWE, and Vattenfall, formed an oligopoly in the German wholesale market for power.⁴⁴⁶ Indicators for lacking competition between the two com-panies were vertical integration on both sides, the behavior observed on the power mar-kets, corporate integration between RWE and E.ON on the one hand, but also between RWE/E.ON and EnWB on the other hand, high market shares at power production capacity as well as net power production, a considerable distance to competitors in the market and the homogeneity of power as a product, combined with transparency of prices at the power exchange.⁴⁴⁷ At large, this strong evidence made the Federal Court of Justice assume a paramount market position of the duopoly E.ON/RWE.⁴⁴⁸

The further question whether the duopoly consisting of E.ON and RWE would rather have to be qualified as an oligopoly, also including EnBW and Vattenfall, is not answered by the tribunal. The FCO, however, in its sector inquiry, identified several indicators that suggest the existence of an oligopoly in the wholesale market for power in the relevant period⁴⁴⁹:

443 Gerhard Wiedemann, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H. Beck, 2008), 988 Ref. 26.

444 European Commission, decisions from November 26, 2008. COMP/39.388 “Deutscher Stromgroßhandels-markt“ and COMP/39.389 “Deutscher Regelenergiemarkt”.

445 German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”.

446 Franz Jürgen Säcker, “Marktabgrenzung, Marktbeherrschung und Markttransparenz auf dem Stromgroß-handelsmarkt”, et, Vol. 61, no. 4 (2011), 76.

447 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 89. With refer-ence to German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”, 18 et sqq. For the relevance of the indicators named see Gerhard Wiedemann, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H. Beck, 2008), 989 Ref. 27.

448 German Federal Court of Justice, decision from November 11, 2008. KVR 60/07 “E.ON/Eschwege”, 25.

449 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 95.

▪ The development of market shares with regard to installed capacity and feed into the grids since 2007, and

▪ the degree of concentration measured using the Herfindahl-Hirschmann-Index (HHI).

The underlying data with regard to market shares yields by far the highest installed capacity and net power production by E.ON, RWE, Vattenfall and EnBW in the years since 2007.⁴⁵⁰ The following chart presents a summary of the data, a market volume of 100 per-cent has served as a reference. The values are rounded.⁴⁵¹

SUPPLIER

2007

CAPACITY FEED-IN

2008

CAPACITY FEED-IN

2009

CAPACITY FEED-IN

EnBW 12 % 12 % 12 % 11 % 14 % 14 %

E.ON 23 % 23 % 23 % 22 % 19 % 21 %

RWE 34 % 35 % 33 % 36 % 31 % 31 %

Vattenfall 17 % 17 % 16 % 15 % 16 % 16 %

Sum 85 % 86 % 84 % 84 % 80 % 82 %

Table 2: Installed capacity and feed-in by the established energy suppliers in percent

The summed numbers presented in table 2 exceed a combined market share of two thirds for the four companies listed. The assumption of collective dominance in Sec. 18(6) N° 2 GWB is therefore confirmed for the years 2007 to 2009.⁴⁵² However, the dominance as-sumption can be disproved by way of evidence for existing competition between the dom-inant firms and a notable competitive position of the residual firms, Sec. 18(7) GWB.⁴⁵³ In its sector inquiry, the FCO examined the competitive environment of the oligopoly firms,

450 The inquiry included power plants owned by the companies, shares in joint plants and contractual long-term buying options for plant capacity. See ibid, 90.

451 For the exact values, especially reports of the MW of capacity installed and the TWh feed-in see ibid, 90, 94.

452 Gerhard Wiedemann, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H. Beck, 2008), 990 Ref. 29.

453 Ibid, 989 Ref. 28.

coming to the conclusion that various structural similarities suggest an alignment of inter-ests and ultimately restraints of competition.⁴⁵⁴ The FCO considers the preconditions es-tablished by the European Court of First Instance in its decision Airtours v Commission⁴⁵⁵ for oligopolized markets to be met.⁴⁵⁶ Due to the oligopolistic interdependence of the four firms, permanent uniform behavior of the oligopoly is expected.⁴⁵⁷

Säcker contradicts the FCO claims, pointing out that the market position namely of E.ON and RWE changed considerably lately through the abandonment of several minority stakes in municipal suppliers, headmost in the case Thüga⁴⁵⁸.⁴⁵⁹ Moreover, Säcker stresses the influence of the European unbundling specifications on the market structure. Eventually, his paper suggests that under these changing conditions, not even the duopoly argument can be maintained.⁴⁶⁰ This claim is based on a study by Frontier Economics from 2010 that sees an erosion of market shares for both E.ON and RWE.⁴⁶¹ This study – a commissioned work for the E.ON group – does however treat possible future scenarios for the market development. By contrast, the FCO data for the situation in 2007 to 2009 does not leave room for an interpretation that sees any erosion in the market shares of E.ON and RWE.

Quite the contrary is true: Table 2 shows, that market shares kept stable at high levels exceeding 80 percent for both installed capacity and production.

With regard to the HHI concentration measure, the FCO identified values easily ex-ceeding the threshold of 1.800 that account for highly concentrated markets.⁴⁶² Both, with regard to installed capacity and quantity produced, the power market´s HHI values sug-gest high concentration of the industry.⁴⁶³

Based on this robust evidence and in line with German and European jurisprudence, the German antitrust authority dismisses its former duopoly assumption for the power market

454 These are namely vertical integration of the firms, corporate integration, the homogeneity of power as a commodity, and the huge distance with regard to market shares to the remaining competitors in the market.

See Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 95. Also Franz Lamprecht, “Sektoruntersuchung Strom: Kein Marktmachtmissbrauch, aber Wettbewerbshemmnisse”, et, Vol.

61, no. 1/2 (2011), 48.

455 Airtours v Commission. Case T-342/99. European Court Reports 2002, II-2585 (2002).

456 The criteria do largely comply with the indicators for lacking competition listed on the last page. The pre-dominant idea is to make a prediction on the probability of coordinated actions by market participants.

457 Franz Jürgen Säcker, “Marktabgrenzung, Marktbeherrschung und Markttransparenz auf dem Stromgroß-handelsmarkt”, et, Vol. 61, no. 4 (2011), 79.

458 Federal Cartel Office, Decision from November 30, 2009. N° B8-107/09.

459 Franz Jürgen Säcker, “Marktabgrenzung, Marktbeherrschung und Markttransparenz auf dem Stromgroß-handelsmarkt”, et, Vol. 61, no. 4 (2011), 81.

460 Ibid.

461 Frontier Economics, Marktkonzentration im deutschen Stromerzeugungsmarkt, 2010. Available online at http://www.eon.com/content/dam/eon-com/download/dwn-news/9949_431/RPT_Frontier_EON-Konzentration-sanalyse_Final_20102010__stc.pdf.

462 Paul A. Samuelson and William D. Nordhaus, Economics (Singapore: McGraw-Hill, 2005), 185.

463 Federal Cartel Office, Sektoruntersuchung Stromerzeugung/Stromgroßhandel, N° B10-9/09, 91.

in favor of the claim, that the wholesale market for power is dominated by an oligopoly formed by E.ON, RWE, Vattenfall and EnBW in the period of examination.⁴⁶⁴

Only in 2015, when the Monopoly Commission presented an updated calculation of the concentration measures in its expert opinion, things slightly changed. For the year 2014 that the data refers to, the Monopoly Commission came to the conclusion that there was no collective dominance of the former oligopoly with regard to the RSI method.⁴⁶⁵ How-ever, it considered the market still to be highly concentrated – especially with regard to a market share of 62 percent of the former oligopoly firms⁴⁶⁶ – and expected new market power problems in the near future due to closures of plant capacity.⁴⁶⁷ The numbers con-cerning the market shares are confirmed by the Federal Network Agency data for the year 2014: The combined market share with regard to production capacity for E.ON, RWE and Vattenfall reached 51 percent⁴⁶⁸ and hence still fulfilled the requirements of the dominance presumption in Sec. 18(6) N° 1 GWB. Having regard to the actual production quantity, even the oligopoly presumption for all four huge suppliers (Sec. 18(6) N° 2 GWB) was still

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