Download DOC - Europa.eu

MEMO/07/407
Brussels, 11th October 2007
Antitrust: Commission increases competition in the
Belgian gas market – frequently asked questions
(see also IP/07/1487)
Who is Distrigas?
Distrigas is currently part of the Suez group, which includes Electrabel, the main
electricity generator and supplier in Belgium, and Electrabel Customer Solutions
(ECS), a gas and electricity reseller. Prior to the liberalisation of the gas sector as a
result of the implementation of the first gas Directive(Directive 98/30/EC,
subsequently replaced by Directive 2003/55/EC), Distrigas had the exclusive right to
transport and store gas underground in Belgium and was the only supplier of gas to
large customers. After the liberalisation, Distrigas remained the largest gas importer
and supplier in Belgium. It is also active on the gas supply markets in France,
Germany and The Netherlands, and on the gas transit and liquified natural gas
markets. In 2006 Distrigas had a turnover of €4 626 million, of which €3 691 million
was made in Belgium.
What would be the effect of a potential GDF/Suez merger on this case?
On 14 November 2006 the Commission approved a merger between Suez and GDF,
subject to remedies including the divestment of Distrigas (IP/06/1558). The latter
measure foresees the conclusion of long-term gas supply contracts between
Distrigas and GDF/Suez, aimed at covering part of the needs of Electrabel and ECS.
The commitments would become applicable if the merger is implemented. In the
meantime, Distrigas is managed independently of the rest of the Suez group under
the supervision of a trustee.
The commitments offered by Distrigas in the present case therefore address three
different scenarios: the current situation, where Distrigas is managed as a separate
company; the reintegration of Distrigas in the Suez Group if it is decided that the
merger with GDF should not go ahead; and the divestment of Distrigas.
While Distrigas is managed as a separate undertaking under the supervision of a
trustee, the commitments would apply only to Distrigas. If the merger is called off, the
commitments would have to be respected by Distrigas and the other companies in
the Suez Group that are active on these markets. If Distrigas is divested, the
purchaser of Distrigas would have to respect the commitments, also for its own
activities on the relevant market provided that they are of some significance.
The long-term gas supply contracts between Distrigas and GDF/Suez are excluded
from the commitments because they are relevant only for the specific scenario of a
merger between GDF and Suez and have to be considered in this context.
Which market is concerned by the commitments?
The relevant product market is the supply of gas to large customers (generally
having an annual gas consumption of over 1 million m³). This market could possibly
be sub-divided into separate markets for different types of customers, such as
industrial customers, electricity producers and resellers. The geographical market
concerned is Belgium.
What practices did the Commission investigate?
The Commission investigated two types of practices: (i) long-term supply contracts
concluded with large customers and (ii) restrictions on the use of gas delivered by
Distrigas to customers. The second issue was a relatively minor part of the case and
was addressed earlier in the investigation by a commitment from Distrigas to
eliminate restrictions on the customers' resale possibilities of gas supplied by
Distrigas. As regards the long-term contracts, the Commission's concern was that
they would tie a significant part of the market demand to Distrigas for a long period
and thereby make it more difficult for competitors to enter the market. The
Commission was therefore concerned that the combined effect of the long-term
contracts would be to significantly close off the market to potential market entrants.
What procedural steps have been taken in this case?
A Statement of Objections was sent in 2004, and a Preliminary Assessment in
2005. On 10 May 2006 the Commission sent a supplementary Statement of
Objections to Distrigas concerning the Commission's concerns that Distrigas could
prevent new suppliers from entering the Belgian gas market in violation of EC
Treaty rules on the abuse of a dominant market position (Article 82, see
MEMO/06/197). On 5 April 2007 the Commission published a notice under Article
27(4) of Regulation 1/2003 in the Official Journal (OJ C77) to market test the
commitments proposed by Distrigas. Eight replies were received, which overall
welcome the commitments. Distrigas offered revised commitments on 12 June
2007 reflecting the comments received in response to the market test.
What is the effect of this decision?
The Commission decision is based on Article 9 of Regulation 1/2003 on the
implementation of the EC Treaty's competition rules. Its legal effect is to make the
commitments offered by Distrigas to remedy the Commission's concerns about
competition problems on the Belgian gas markets, legally binding and to end the
Commission's proceedings. In light of the commitments offered by Distrigas, the
Commission has come to the conclusion that there are no longer grounds for action.
In Article 9 decisions the Commission does not make any finding whether or not
there has been an infringement of EC competition rules. However, if Distrigas were
to break its commitments, the Commission could impose a fine of up to 10% of
Distrigas' total turnover without having to prove any violation of the EC Treaty's
competition rules. It would be sufficient to prove that the commitments have been
breached. The commitments are binding until 31 December 2010.
What are the commitments?
The commitments are summarised in the notice published in the Official Journal on 5
April 2007 (OJ C77).
2
Under these commitments, Distrigas will reduce the volumes of gas sold in Belgium
that are tied to it under long-term contracts. This means that other gas suppliers will
be able to compete with Distrigas for the demand freed up, to build up a portfolio of
customers. For industrial users and electricity generators the commitments will
ensure that Distrigas does not tie a substantial part of the market (equivalent to 30%
of its sales) for more than one year ahead, while allowing Distrigas flexibility on
managing its portfolio of contracts. Distrigas agreed to ensure that on average 70%
of the gas that it has contracted to supply to customers covered by the commitments
will return to the market every year.
Under the commitments, Distrigas will also not conclude new gas supply contracts
with gas resellers for a duration of over two years. The maximum duration of new
contracts with other large gas customers (industrial consumers and electricity
generators) will be five years. An exception applies to new gas fired power plants,
which are not covered by the commitments.
Under the commitments, Distrigas retains considerable flexibility in how to manage
its contracts with industrial customers and electricity generators. For instance,
Distrigas could conclude one year contracts for 40% of its sales and two year
contracts for 60% of its sales or it could conclude one year contracts for 62.5% of its
sales and five year contracts for 37.5% of its sales. In both scenarios, Distrigas
would meet its obligations under the commitment. In practice, of course, Distrigas'
actual portfolio of contracts will be much more diversified.
There is some flexibility in the commitments to allow Distrigas to meet the average of
70% over the lifetime of the commitments, but each year at least 65% of its total
contracted gas volumes must return to the market. The commitments ensure that
even if Distrigas' sales volumes decrease over the life time of the commitments it will
be able to tie a fixed volume of gas for more than a year ahead. This fixed volume
represents about 20% of the total sales to the customers concerned.
Will Distrigas' customers have to renegotiate their existing contracts?
The commitments ensure that Distrigas' customers will not have their existing
contracts prematurely terminated. For customers with contracts longer than five
years, Distrigas will grant unilateral annual termination rights with prior notice and
without indemnity. These contracts will be treated as short-term contracts for the
purpose of the commitments.
How does this decision compare to the Bundeskartellamt decision
against EON Ruhrgas?
In January 2006 the Bundeskartellamt adopted a decision against E.ON Ruhrgas for
closing off downstream gas resellers in Germany. Under the decision, E.ON Ruhrgas
had to limit the duration of contracts under which it effectively supplied more than
80% of a customer's total demand to two years maximum and to maximum four
years when the contract represented between 50% and 80% of a customer's actual
demand.
The potential harm to customers in the Distrigas case and the E.ON Ruhrgas case
are very similar. In both cases, the contracts with gas resellers have been limited to a
duration of maximum two years. As regards industrial consumers or electricity
generators, which are not covered by the E.ON Ruhrgas decision, Distrigas has
more flexibility over the duration of the contracts, provided that the overall conditions
to limit closing off the market are met.
3
How will the Commission monitor the commitments?
During the life of the commitments, Distrigas will send the Commission an annual
report on its compliance with the commitments in the previous year.
How long will the commitments last?
The commitments will be effective for four years, from 2007 until the end of 2010.
Competition is gradually developing in the Belgian gas markets and could take off
rapidly under the right conditions. It is therefore important to ensure that alternative
suppliers are not faced with barriers to entry due to the closing off of customers. The
period until the end of 2010 will therefore be crucial. This period is covered by the
commitments.
The commitments will not apply whenever Distrigas' market share drops below
40% or the market share of its nearest competitor comes within 20% of Distrigas'
market share. This part of the commitments takes into account the fact that the
Commission's competition concerns were based on the abuse of a dominant
market position (Article 82).
Are long-term contracts as such illegal under the competition rules?
In certain circumstances long-term contracts give rise to competition concerns
because they make it more difficult for competitors to enter the market. These
concerns were identified in the Commission's competition inquiry into the energy
sector published in January 2007 (see IP/07/26 and MEMO/07/15). In this context,
the Commission recently opened proceedings against EDF and Electrabel for
possible closing off ("foreclosure") of the electricity markets in France and Belgium
(see MEMO/07/313). However, long-term contracts between a supplier, such as
Distrigas, and its downstream customers are not as such incompatible with the EU
competition rules and must be assessed in the overall context in which they occur.
When assessing the likely positive and negative effects on competition in individual
cases, the Commission focuses on five elements: (i) the market position of the
supplier, (ii) the share of the customer's demand tied under the contract, (iii) the
duration of the contracts, (iv) the overall share of the market covered by contracts
containing such ties, and (v) efficiencies.
i. The market position of the supplier
The starting point of the analysis is the market position of the supplier. In markets
dominated by a single supplier, as in the case of Distrigas, the focus will be on the
portfolio of contracts concluded by this supplier. Long-term contracts concluded by
other suppliers will generally not give rise to concerns. However, in some cases, in
particular when no single firm is dominant, it is necessary to consider the cumulative
effect of the bundles of contracts concluded by several suppliers.
ii. The share of the customer's demand tied under the contract
When a customer is obliged to buy all or a good part of its requirements from a
particular supplier for a certain period of time, the customer is no longer available as
a potential customer for other suppliers. Such contracts may therefore contribute to
close off the market to other suppliers and thereby help a dominant supplier or a
group of strong suppliers to maintain or strengthen their ability to set prices and other
conditions on the market.
4
iii. The duration of the contracts
If the contracts are of short duration, customers will quickly return to the market and
so become available as a potential customers for other suppliers again. In markets
such as the Belgian gas market, where only very few customers have more than one
supplier at a given moment in time, short-term contracts do not give rise to
foreclosure concerns. However, when the contracts are of long duration, competition
concerns may arise because customers are prevented from switching to alternative
suppliers even if they offer a better deal.
iv.
The overall share of the market covered by contracts containing
such ties
When long term contracts that tie customers to a particular supplier cover only a
small part of the market, concerns that the market will be closed off to potential
market entrants are unlikely to arise. This is so, even when the contracts are
concluded by a dominant firm. However, when such contracts cover a good part of
the market, competition concerns start to arise. In the Distrigas case, the
Commission considered that no competition concerns would arise if the contracts
that lasted for more than a year would cover less than 20% of the market. This
assessment took into account the existence of a duration limitation of 5 years, that
would avoid that customers who would be particularly likely to switch supplier could
be tied for a very long period of time, which in itself would give rise to competition
concerns. While these thresholds may provide a yardstick for other cases, it is
important to note that each case is assessed on its own merits.
v. Efficiencies
Even if a long-term contract contributes to an overall effect of closing off the market
to potential market entrants (foreclosure), the Commission will assess whether it
generates efficiencies that outweigh the negative effects. This is the reason why in
the Distrigas case supplies to new power plants are excluded from the scope of the
commitments. Adding new generation capacity to the Belgian electricity market is
beneficial because it will increase output on the market. Moreover, it could not be
excluded that gas supply contracts lasting longer than 5 years would be necessary to
make such a project viable. Such contracts should therefore be assessed on a case
by case basis.
It follows that long-term contracts are only incompatible with EC competition rules
when they are likely to have negative effects on competition due to their significant
foreclosure effects and these negative effects are not outweighed by efficiency
benefits. However, it is not sufficient that individual customers may have encouraged
the supplier to conclude the long term contracts because they think that this allows
them to get the best deal from the supplier in question. What may be in the interest
of the individual buyer, may not be in the interest of the overall market and
consumers. If long-term contracts allow the supplier to significantly foreclose the
market, customers and consumers would be better off without them. The reduction in
barriers to entry resulting from the absence of long-term contracts will over time
increase the competitive constraint on suppliers.
5