Following the recent 280.5 million Euro fine ordered by Neelie Kroes, European Commissioner for Competition, to the Microsoft Corporation for failing to comply with the European Commission’s antitrust ruling, E.ON “became the first major continental power company to propose a break-up of major parts of its network,” apparently “handing a victory to the European Commission in its efforts to break the stranglehold the Continents dominant players have on the market,” as reported by The Independent (UK).
According to Business Week, the European authorities are being pushed by the British for utilities “to give up control of profitable distribution networks used to transport energy across the Continent. . . The goal is to level the playing field and make it easier for new entrants to take on incumbents such as GDF and Germany's E.ON. Analysts figure structural separation will help bring down end-user prices by letting new firms compete with former state-owned monopolies.”
Such structural separation of utilities is a low leverage intervention that doesn’t level the playing field as it was demonstrated in Spain, where incumbents made a lot of distortions. In addition, in such separation, the business critical issue of customer satisfaction is left unaddressed by first generation retailers. I suggest that the European approach needs to change to empower the customer. The separation required is to shed the T&D grid to come up with an integrated T&D transportation grid, as envisioned in the EWPC market architecture and design paradigm shift.
A recent working paper, “Electricity Prices and Costs Under Regulation and Restructuring,” published by the Carnegie Mellon Electricity Industry Center, offers negative results of the low leverage structural separation in the U.S.A. According the authors, Seth Blumsack, Lester Lave and Jay Apt, “Restructuring was expected to improve the operating efficiency of electric power generators, leading to lower production costs and retail prices.” The paper “concludes that there have been some efficiency gains” for generators, but not necessarily for consumers.
Customers should be empowered to make timely decisions that regulator and utilities cannot do for them in a cost effective manner. They need to get involved as soon as possible to enable demand integration to power system planning, operation and control (See the EWPC article Demand Integration is NOT the Province of Politics.) The growth of the power industry should be centered in the increase of the communications assets intensity to reduce the energy assets intensity.
Tam Hunt is right: “Energy efficiency is far cheaper than any power technology and there is vast potential to increase efficiency in the US. . .” and elsewhere. But a cost efficient implementation cannot be done by regulatory mandates; it requires a high leverage restructuring of the power sector introducing Second Generation Retailer - 2GR to develop The Sixth Disruptive Technology “To do a better job of managing our dwindling energy resources…”
To enable such leverage it is necessary Shrinking the Regulator’s Jobs. Today´s reality can be understood by a general agreement that "There are massive problems to be solved in the electric industry, costing massive amounts of money, and with very little time to do it," that is giving rise to the Global Citizens' Call to Arms to perform the shrinking.
I hope that Neelie Kroes and her staff gets interested in learning about EWPC as soon as possible.
Mar 13, 2008 -- Datamonitor
E.ON, the largest investor-owned utility in Europe, is to voluntarily divest its electricity transmission network assets. However, E.ON's decision is based more on shrewd pragmatism than on an embrace of European Commission competition policy. Indeed, E.ON hopes that by giving up its power network business it will be better positioned to hold on to its gas networks.
E.ON's move was unexpected, especially considering that the German and French governments adamantly opposed the break-up of energy utilities within their markets. Ironically, just prior to reports of E.ON's decision, the European Commission (EC) indicated that it may consider a compromise "Third Way" alternative to ownership unbundling, in which the independence of network subsidiaries would be strengthened instead of pursuing fully fledged asset unbundling.
Nevertheless, E.ON's proposal to the EC to divest its power transmission network, as well as almost 17% of its generation capacity, is a significant milestone for the EC in its move towards network unbundling. Consequently, the EC will no longer pursue its ongoing anti-trust cases against the utility in the electricity sector.
Divesture would give E.ON increased leverage when expanding into other markets. Regulators, governments, competitors and takeover targets often cite anti-competitive advantages, in this case vertical integration, as justification for resisting a takeover. Notably, the EU's Third Energy Package specifically places restrictions on foreign vertically integrated utilities from acquiring network assets. Foreign markets can use this argument against E.ON to thwart its expansion into their utilities sectors.
The utility also stands to benefit from being the first mover to divest its network assets. Unbundling will lead to a buyer's market as network assets in major markets go on sale more or less simultaneously. By pre-empting EC unbundling legislation, E.ON is in a favorable position to negotiate the terms and conditions of the divesture of its assets with potential buyers.
Despite the fact that networks represent a stable but regulated source of income for the parent company, German network owners face increased regulatory risks. Legislation has been passed that introduces an incentive form of regulatory regime for German network owners. Transmission tariffs will therefore depend on the network operations meeting specific efficiency targets. As a network owner and operator, E.ON will be obliged to increase its capital investments in its network. Apart from the network's purchase price, estimated expansion and maintenance costs for the network would run into the billions.
Not only has the company averted infringement proceedings against its electricity business, it can now forcefully negotiate holding on to its gas network assets. The deal with the EC does not involve the divesture of its gas network, which is more strategically important to E.ON's overall business than its power network. Arguably, E.ON's strategy of appeasing the EC may enhance its power in negotiating the retention of its gas networks.
Curiously, the momentum now lies with the EC in its push towards unbundling, and with E.ON in its attempts to protect its business interests. Although opponents of unbundling are now on the defensive, most will fail to stave off unbundling. However, E.ON has made a distinction between its power and gas businesses, which may provide an implicit signal to the eventual outcome of ownership unbundling.