(Die Passagen zur eigentumsmäßigen Entflechtung des Netzbetriebs sind rot markiert)

Neelie Kroes
European Commissioner for Competition Policy

The need for a renewed European energy policy

OFGEM seminar on Powering the Energy Debate: Europe - Competition and Regulation
London, 28^th September 2006

Ladies and gentlemen,

I’m delighted to join you in London today. OFGEM, the European Commission’s partner in this conference, is rightly considered to be one of Europe’s leading energy regulators. I would like to thank Sir John Mogg and his team for hosting this event, and for making it such a European occasion (but then, with Sir John so personally involved, I would not expect anything else!).

Our topic for today ­ energy ­ is proof of why the European project really is worth its salt and, in my view, well worth fighting for. The case for a joined up European policy in a particular field does not always makes immediate sense to politicians or their public. But energy is one of those areas where Europe really can add value.

Energy is an issue of immediate and direct concern to consumers ­ individuals and business alike - and which is crucial to Europe’s vision of sustainable economic growth and jobs.

I'd like to use my time today to explain why an energy policy for Europe really does make sense. I'll then look at some of the very concrete obstacles which we have to overcome if our energy markets are to function well together to deliver security and sustainability. I'll explain what the European Commission is doing, in particular through our competition policy, to help overcome these problems. And finally, I'll look forward to the steps ahead in the coming months and years.

The case for a European energy policy

So to start with the basics: why do we need an energy policy for Europe?

To put it very crudely, we all ­ businesses, industry, individual consumers ­ want to know that when the switch is flicked, the lights go on. And that at the end of the month the bill will be affordable and fairly linked to the costs of the energy consumed.

It is crazy that because a very hot summer is predicted in Italy, or a very cold winter is expected in the UK, the natural reaction is fear of shortages. It's crazy quite simply because, at the same time as millions of air conditioning units cause blackouts in Italy, or millions of central heating systems risk overloading supply availability in the UK, there are underused energy supplies available elsewhere in Europe.

And it's also crazy that at a time when Europe is increasingly dependent on external energy sources, people still think of national solutions rather than look to the advantages which operating on a European scale can offer in terms of bargaining power.

Europe has entered a new energy era. Energy demand will continue to increase, as will competition for global energy resources. In 25 years' time, between 80 and 90% of our oil and gas demand will be met by imports from third countries. And recently we have seen high and volatile energy prices, and realised our dependence on external suppliers.

We have to react to today’s rapidly evolving markets, to ensure influence on global developments and to manage our external dependence. We must diversify the energy mix as well as our imports, so limiting our exposure to future price shocks and political risk.

We have to answer the crucial question of how to achieve our climate change objectives and play a leading role in the global search for renewable energy solutions. And we must do all these things in a way that is compatible with our growth and jobs aspirations, while harming neither the competitiveness of our industry nor the wellbeing of our citizens.

These challenges require a common EU response.

The EU response

That is why the UK showed spot-on vision when it chose to promote a single EU energy policy as a priority of last year’s Presidency.

The vision is of an open and competitive internal energy market. Where European energy companies can compete amongst each other, diversify their sources, and trade and exchange supplies to meet demand. Where the lights go on whenever the switch is flicked, wherever you are in the Union. Where we export European expertise and ideas for energy efficiency and innovative technologies. And where Europe speaks with one voice to the rest of the world, pooling our weight at global level, ensuring secure, well-priced supplies for customers across the Union.

This is the vision that the European Commission is determined to turn into reality. We set it out in the Green Paper launched earlier this year. In January 2007 we will present a Strategic Energy Review, looking at where Europe is in terms of energy and what we need to change if we are to achieve our policy goals. And next Spring European Heads of State and Government will adopt what needs to be an ambitious Action Plan to put real flesh on the bones.

But none of this can work unless it really makes sense, and not just to those within the Brussels ring-road. Which is why discussions such as those we'll have here today are so important.

Functioning of the markets

Ladies and gentlemen,

There is another essential precondition for a successful European energy policy, and that is a well functioning internal market in electricity and gas. Competition policy and enforcement of the EC competition rules (be it for state aid, merger control or anti-trust) play an essential role in delivering this.

The three objectives the Commission set out in our Green Paper were competitiveness, security of supply and sustainability.

The competitiveness of the European economy depends on market-based, competitive electricity and gas prices. Security of supply is enhanced through correct market signals which will lead to the necessary investments within the EU as well as to a diversification of supply. And sustainability is boosted by correct price signals which give incentives to energy efficiency and energy saving.

This was exactly the rationale which underpinned the liberalisation process driven by two sets of European directives over the last ten years. The aim was to open the way for competition, to increase efficiency in the production, transmission and distribution of electricity and gas. And some Member States have been rather successful in reaching this aim, the UK being one of them.

But it is clear that no-one in their right mind could say that a competitive single European energy market is already in place today. Before I started work as European Commissioner I felt this as strongly as anyone. Once I got into the job, I decided to go out and see if my feeling - and I know it was shared by objective market supervisors like OFGEM - was matched by reality. As you know, the result was the sector inquiry into competition conditions in the electricity and gas sectors.

The sector inquiry

The preliminary results of the inquiry certainly proved that the malfunctioning in this sector is significant. I know you are familiar with our findings:

• first, too much market concentration creating scope for incumbents to raise prices;
• second, a lack of liquidity and too much tying of infrastructure and supply which prevents successful new entry and reduces consumer choice;
• third, very little cross-border integration. For gas, it is difficult to secure transit capacity on key routes. For electricity there are long-term capacity reservations and insufficient inter-connector capacity;
• fourth, a huge lack of transparency;
• fifth, prices are not determined on the basis of effective competition.

I will present the final report of the inquiry early next year. It will integrate comments from the public consultation, and will also include new analyses of the LNG market, the downstream electricity market and the functioning of the power exchanges.

But in the meantime we're not just working on the final report. We are also acting on two other fronts: first, as regards the recent merger wave, and second through specific case investigations.

The Commission is acting through competition policy

Cross-border mergers are increasing in the EU, and particularly in liberalising sectors such as gas and electricity. The trend has been clear over the past five years, and in just the first half of 2006, the European Commission has already been involved in ten cross-border energy mergers ­ that's three more cases than we had in the whole of 2005.

This is a welcome development. In sectors like energy it shows that, whatever the imperfections ­ and we have seen there are plenty - the single market is at least starting to work.

Companies are making the most of the opportunities available. And it's important that they are allowed to get on with it without unjustified interference from politicians. It is always very regrettable when we get into a position where the Commission has to intervene to remind Member States of their obligations under EC competition law and the Treaty rules on free movement of capital. But that is our job under the Treaties. We do it under the judicial control of the European Courts, with rigour and with an even hand, to ensure a level playing field for everyone in Europe.

The second way competition tools are already helping tackle the problems identified is through individual investigations. In May we launched dawn raids at utilities companies in six Member States. This was one of the largest coordinated inspection exercises ever organised by the Commission. Although I am not at liberty to give you more information, I can assure you that these investigations are being pursued most 'energetically' (if you'll forgive the pun!).

Where next?

Ladies and gentlemen, let me turn to my fourth and final topic ­ what comes next?

I've already mentioned that the results of the sector inquiry will come in January. It'll be a parallel production alongside my colleague Andris Piebalgs’ report on progress on liberalisation of the energy markets. The package is intended to provide a solid basis for a constructive debate on the need for new structural and regulatory measures in this sector. It will pave the way for the development of the Action Plan the European Council will adopt.

While it is too early to say what will come out of this reflection, I would like to mention two areas I think should be next steps in the development of a European Energy Policy.

The first obvious candidate is transparency. The price spikes in the UK gas market last winter and the difficulties in determining why more gas was not flowing from the Continent to the UK are a clear indication of this. If the authorities have difficulties getting the information that they need, competitors of the vertically integrated incumbents must be operating completely in the dark. So regulation here may well be needed.

However, transparency alone will not suffice. Personally, I am convinced that further unbundling of network and supply activities is needed to effectively remove conflicts of interest and to create the right investment incentives. Investments should be made when it is good for the network business and not only when it is good for the integrated company itself. Furthermore, network companies should not favour their own distribution or generation companies, at the expense of independent companies.

However, two national competition authorities have recently had to take decisions, implying large fines, against integrated energy companies for violations on both those types of issues. In my view those decisions, which I welcome, illustrate the difficulty for integrated companies to introduce and maintain internal “Chinese walls”.

In addition, we have indications that legal unbundling has not prevented information flows between network and supply units. All these examples strengthen the case for moving towards ownership unbundling and this is something I will definitely discuss with my colleagues in the coming months.

Concluding remarks

Ladies and gentlemen, allow me to conclude.

This morning I have set out the need for a renewed European Energy Policy, as well as the steps we are taking to tackle concrete barriers to properly functioning European Energy markets.

With the strategic energy review, the final report of the sector inquiry and the anti trust investigations. With the energy mergers, the state aid investigations, the energy package, and possibly proposals for legislative changes, this will certainly be an 'energy-intensive' autumn for the Commission in more ways than one!

Thank you very much for listening so carefully. I hope you enjoy the day and I look forward to hearing how the debate went and any conclusions you may draw.