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The Vattenfall / Nuon Energy Case — Upholding Competition on Electricity Retail Markets in Germany

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The Vattenfall / Nuon Energy Case — Upholding Competition on Electricity Retail Markets in Germany Competition Policy Newsletter The Vattenfall / Nuon Energy case — CONTROL MERGER Upholding competition on electricity retail markets in Germany Tiziana Lo Nardo, Martin Godfried, Kristóf Kovács (1) 1. Introduction 1 3. Market definition: retail sale of The Vattenfall/Nuon case (2) concerned the merger electricity to small customers between two energy utilities with activities in both electricity and gas markets. However, the only sig- The key point in this case was to assess the scope nificant overlaps between the two undertakings’ of the market for the retail supply of electricity to operations were in the retail supply of electricity to small consumers in Germany, as the parties’ activi- ties were found to significantly overlap in Berlin and small customers in Berlin and Hamburg. For this 4 reason, the Commission focused its enquiry on the Hamburg ( ). While previous case law judged that scope of electricity retail markets for small users in electricity retail markets in Member States are gen- Germany. erally national in scope, provided that these are fully liberalised (5), information gathered by the Com- The Commission’s investigation showed, as had ear- mission about the development of competition in lier investigations by the German Federal Cartel Of- Germany strongly indicated that the scope of the fice (“Bundeskartellamt”) relating to these markets, electricity retail market for small customers may be that despite an increasing level of competition in narrower than national. electricity retail markets for small customers in Ger- many, there are strong indications that local markets The market analysis showed that, from a regulatory still exist. perspective, German market players are able to sup- ply electricity anywhere in Germany and each cus- Accordingly, the notified transaction was also as- tomer can freely choose among the providers that sessed at local level where the Commission found are operating in a given location. that the deal would have restricted competition in Berlin and Hamburg by removing Nuon as the However, those results equally showed that — even strongest competitor of the incumbent Vattenfall in 10 years after liberalisation — customers still have its historical supply areas. The Commission there- great confidence in the Stadtwerke (municipal utilities) fore decided to clear the case only if substantial which control the physical electricity distribution remedies were put in place. network. On average around 80 % of households are still supplied by Stadtwerke or regional suppliers, 2. The parties and the transaction and half of those customers still receive their elec- tricity under the terms of the – usually most expen- Both Vattenfall and Nuon Energy are involved in sive – default universal supplier tariffs (6). the generation, wholesale supply, retail sale and trad- ing of electricity as well as in the wholesale and re- In addition, analysis showed that although small cus- tail sale of gas in some EU Member States. tomers’ switching rates have increased, on average, from 1.8 % in 2006 to 3.8 % in 2007 and around The transaction involved Vattenfall acquiring full 5.2 % in 2008 (7), competition in the German retail control of Nuon Energy. Specifically, Vattenfall in- tended, as a first step, to acquire 49 % of shares in (4) See cases COMP/M.5224 — EDF / British Energy, Nuon Energy and to acquire the remaining shares COMP/M.3440 — EDP / ENI / GDP, COMP/M.4180 in three subsequent tranches over a period of six — Gaz de France / Suez, COMP/M.3868 — Dong / El- years (3). However, under the contractual arrange- sam / Energi E2, COMP/M.3696 — E.ON / MOL. ments, Vattenfall was expected to acquire exclusive (5) See cases COMP/M.5224 — EDF / British En- operational control of Nuon Energy with the pur- ergy, COMP/M.4180 — Gaz de France / Suez and COMP/M.3696 — E.ON / MOL. chase of the first tranche of shares. (6) Customers who are supplied under the universal supplier tariff have not exercised their right to switch to a new con- (1) The content of this article does not necessarily reflect the tract. official position of the European Commission. Responsi- (7) Figures for 2006 and 2007 are based on the Monitor- bility for the information and views expressed lies entirely ing Report for 2007 and 2008 by the German network with the authors. regulator Bundesnetzagentur (BnetzA). The most recent, (2) Case COMP/M.5496 Vattenfall / Nuon. preliminary data from BNetzA’s 2009 monitoring exercise, (3) Two tranches of 15 % two and four years after the acquisi- covering only the top 70 DSOs (issued on 9 June 2009), tion of the first 49 % stake, and the third tranche of 21 % indicates that the switching rate increased by 1.4 percent- after six years. age points to around 5.2 % in 2008. Number 3 — 2009 49 Merger control markets for electricity to small end users is still in Figure 1: Energy charges for ‘competitive’ its infancy. (non-universal) supply to households When assessing the geographic scope of the elec- by universal suppliers in Germany, tricity retail market, the Commission found no ho- in 2007 and 2008 mogeneity among the switching patterns for small Non-last resort offer price for households from each supplier 2007 end-users across the distribution system opera- 11 tor (“DSO”) areas. Some areas experienced ‘high’ switching rates in 2008 while customers in other ar- 10 eas have not done much switching between electric- ity suppliers. 9 In the course of its market investigation, the Com- 8 mission also examined universal suppliers’ prices for energy (excluding network tariffs and tax), based on 7 data from the energy market monitoring exercise 6 carried out by the German energy market regula- tor (Bundesnetzagentur – ‘BNetzA’). The results 5 showed that energy fees charged to households households, in cts/kWh price in for contract Yearly Sample of top 70 suppliers differed significantly across Germany in 2007 and Non-last resort offer price for households 2008, as is shown in Figure 1 below. For 2008, en- from each supplier 2008 ergy charges vary by 45 % across the top 70 suppli- 11 ers, between 5.6 ct/kWh and 10.2 ct/kWh. These 10 differences in pricing policies between regions and network areas were also confirmed by the vast ma- 9 jority of the electricity retailers the Commission in- terviewed. 8 7 6 5 Yearly contract price in for households, in cts/kWh in price for contract Yearly Sample of top 70 suppliers Source: Data from BNetzA; computation by the Commission. Note: Scales have been truncated. These graphs show only non-universal ‘competitive’ supplies by universal suppliers in Germany in their own DSO area. The 2008 data are based on the most recent, preliminary data from the BNetzA’s 2009 monitoring exercise. Furthermore, the Commission compared energy charges — based on the best offer (lowest overall tariff) per DSO area — with the average energy charge in all German DSOs (8). As shown in Fig- ure 2 below, the results indicate a spread of around +20 %/–40 %, indicating significant differences be- tween competitive conditions in the different DSOs as a result of the differences in price among the German network areas. (8) Best offer excluding pre-paid tariffs. The spread is even larger when pre-paid tariffs are included in the calculation. 50 Number 3 — 2009 Competition Policy Newsletter Figure 2: Comparison of energy charges between Therefore the Commission limited its investigation CONTROL MERGER DSO areas on the basis of the best to the effects of the transaction on this segment of competitive offer within a DSO area, the retail market in those two cities. March 2009 30% Retail supply of electricity in Berlin and Hamburg 20% The parties’ joint market shares in the retail sup- 10% ply of electricity to small customers were found to 0% be [80-90 %] in both Berlin and Hamburg with an increment in each city of [5-10 %] and [0-5 %] re- -10% spectively. These combined market shares overshad- owed those of the other competitors, and thus even -20% at first sight appeared to give cause for concern. To -30% substantiate these concerns, the Commission de- cided to investigate the strength of the competitive -40% pressure exerted by Nuon Energy on Vattenfall in Deviation from average energy fee (EUR/kWh) energy average from Deviation its home markets, Berlin and Hamburg. -50% German DSOs For this purpose, the Commission carried out both a Source: Verivox. quantitative analysis of the data regarding customer Note: This graph shows the best competitive offer prices switching to and from Vattenfall and a qualitative per zip code for 4 000 kWh per year, non-prepaid analysis of the replies to the market investigation. tariff, energy only price, excluding taxes, excluding all zip codes that overlap within DSOs. The examination of the switching data showed Finally, the Commission analysed the marketing that, within the testing period taken into account, strategies of the electricity suppliers in Germany. the numbers of customers supplied each month by Most of the operators who answered the questions Vattenfall and Nuon Energy in Berlin and Hamburg put to them in the Commission’s market investiga- moved in opposite directions. In other words, a de- tion argued in favour of local marketing campaigns. cline in the number of customers supplied by the They consider it more profitable to acquire a solid one matched an increase in the number supplied by customer base in few areas rather than nation wide, the other. No direct causal link could be established as there are significant economic barriers preventing between these trends because the data do not show operators from entering the retail electricity markets the electricity providers to which customers were in Germany. In addition, the feedback received by switching in each case. Nevertheless, the Commis- the Commission showed that retailers focused pre- sion found that the customer behaviour observed dominantly on local activity because it was difficult in Berlin and Hamburg was an indicator of the to develop customer awareness and to acquire a suf- constraint exerted by Nuon Energy on Vattenfall in ficiently large customer base nation-wide.
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