"... there is no certainty that the new (German) energy law will provide... the ... benefits of greater competition"

While most of the market’s focus is on the EU Emission Trading Scheme and the Kyoto Protocol, which was formalised on 16 February, there are a number of developments taking place in Europe’s energy market, which could have an impact on competition. Two of these developments relate to regionalisation, and two to regulation. Regionalisation, as a market theme, has largely been suppressed in the European energy market as Brussels sees Europe itself as the most important market region. But with the values of a EU internal energy market yet to be realised, and some might suggest never likely to be realised, there is value in addressing sub-regions within the EU. In this respect the introduction of a single Iberian market, MIBEL, now planned for this summer will provide an opportunity to assess the values of sub regions. While not the most important European region in terms of size and energy capacity it will nonetheless provide a benchmark of sorts in how member states can be grouped into energy regions.

One of the main issues in grouping member states together to provide a larger energy region is transmission operation, management and charging. And it is these issues that still remain unresolved in the scheduled introduction of Betta, the British Electricity Trading and Transmission Arrangements, due to enter force on 1 April and potentially liable to make an April Fool of the government.

To most people Betta is just a wider geographical version of Neta, i.e. adding Scotland to the England & Wales market, but the key difference is transmission and the concerns being expressed by the Scottish utilities that the current Neta transmission charging methodology will have a negative impact on their transmission costs relative to their competitors. At the centre of the problem is the requirement for Scottish utilities to migrate from asset-based transmission charging to the process investment-cost related charging, which has been employed in England and Wales for the past twelve years. Scottish generators will face increased costs due to different generation-demand relationship in Scotland (almost the inverse of that in England and Wales) which could, argue the utilities, force the early closure of plant and impact on British system margins.

These are valid concerns but could have easily been mitigated if the development of he market had been handled in a more inclusive manner. Since the introduction of Neta Scottish utilities have benefited from the trading arrangements without being party to the regime. While ownership of the England and Wales’ utilities has changed hands (sometimes more than once) the Scottish pair of utilities have retained their independence and grow their business. But these companies cannot expect to keep benefiting from the trading arrangements and not be subject to the transmission arrangements.

Of the regulation developments both are interesting; EdF’s partial privatisation will be completed before the year is out while an independent Germany energy regulator may be in place as early as 1 April. Both of these developments were mandated by the second competition directive, which came into effect in July 2004, though the sceptics amongst us doubt the eventual realisation of these developments will have a marked beneficial impact on the progress to an internal energy market.

The partial privatisation of the French utility monopolies is so partial it is almost a token gesture. After the gallant French union resistance of last year, which resulted in the government guaranteeing to keep a minimum 70 per cent ownership of each company, the unions are still berating the government for its decision, convinced that a public service has to be centrally run and that through privatisation the service will deteriorate. But if the unions were honest they would probably admit their main concerns are job security and not necessarily customer service. And somewhat ironically their real concerns may be realised.

While the scale of privatisation will unlikely change the dominance of these utilities neither will it provide them with the necessary capital injection to continue the state-sponsored corporate lives they had become accustomed to. This has been of particular concern to the new management of EdF, which has been pleading to no avail with the new French finance minister to sanction a large increase in its tariffs so as it can cover its debts without having to sell some of its acquired assets. If the extra funds are not forthcoming the company may decide some cost cutting is in order and the some jobs may be less secure. But we should not shed any tears for EdF, as with a minimum stake of 70 per cent the French government is unlikely to let its investment fall on hard times. It is similarly difficult to see any fundamental change in competition as a result of the partial privatisation, and with both EdF and GdF now having commercial status the merger of the companies becomes a possibility. More likely is the two companies developing strong dual fuel businesses and effectively turning the French gas and electricity markets into a duopoly. Either way the prognosis for improved competition looks remote.

A similar prognosis is forecast for the German market, which, according to the media, may have an independent energy regulator taking office on 1 April. But the chance of either the government of the utilities being made April Fools is minimised as Germany’s government and upper house have yet to reach a compromise position on the country’s energy law. One area of agreement that has been reached between the two appears to be that of ‘incentive regulation’ which economics minister Wolfgang Clement has described as ‘a mixture of the stick and the carrot’. This incentive regulation mainly relates to grid access fees, which have been a contentious issue for many months. The view of the government is that the country’s four grid operators will have to reach time specific targets before realising any economic incentives. But for an industry that has enjoyed the riches of self regulation since the market was deregulated, and which habitually seems able to diffuse government proposals that are deemed disadvantageous to its members, there is no certainty that, when eventually introduced, the new energy law will provide the necessary reform and the consequent benefits of greater competition. More likely the government will continue to get the stick and the dominant German utilities the carrot.