A Powerful Competition Policy - 7. Conclusions and Recommendations
Face - Contents - Bottom - Previous/Next "A Powerful Competition Policy" 7. Conclusions and RecommendationsIn this concluding chapter we will specifically reply to three requests in the mandate of the working group:
7.1 Competition Concerns on the Nordic Power MarketThe Working Group would like to emphasise that the deregulation of the Nordic electricity sector has been largely successful. The reforms have made it possible to utilise the complementarities of the coexisting different production technologies. In addition, integrating the national markets of Sweden, Denmark, Finland and Norway has decreased market concentration. Or to be more precise: the negative effects on competition of increased concentration in the national markets have been to some extent been offset by market enlargement. However, it would be an exaggeration to state that the Nordic market is fully integrated. Statistics from Nord Pool shows that the market was fully integrated in 52% of the time in 2001 and 35% in 2002. This means that in more than half of the 8760 hours of the year the Nordic market is divided into two or more regional markets. Therefore, the relevant markets may vary from one hour to the next. The national markets are heavily concentrated: Vattenfall has almost 50% of the Swedish market. The two Danish producers Energi E2 and Elsam are almost monopolists in respectively Denmark East and Denmark West. Statkraft has approximately 45% of the Norwegian market (including its share of production in BKK, Agder Energi and E-CO). And in Finland the duopoly Fortum and PVO/TVO together have 65% of the market. Widespread cross-ownership among the Nordic power producers makes the markets even more concentrated. Taking cross-ownership into account we find the following Herfindahl-Hirschman concentration indexes in relevant Nordic markets: The Nordic region: 1138 Sweden: 2988 Denmark [36]: 4844 The calculations show that the national markets are highly concentrated, while the integrated Nordic market is moderately concentrated. [37] Joint ownership of power plants in Norway and Sweden adds to the market concentration. Taking these effects into account we find the following HHIs: Sweden: 3169 The Working Group would like to point out that market concentration indexes in the national markets are high. The integrated Nordic market is moderately concentrated according to the cross-ownership adjusted HHI. The market concentration figures give cause for concern about how well competition functions in the relevant Nordic power markets. In addition the power market has certain characteristics that add to this concern. In particular, production technologies vary with respect to flexibility and in high load periods several plants will operate at maximum capacity. This means that the competitive check on producers trying to exert market power might be restricted in periods, confer section 4.2. Furthermore, demand for electricity is inelastic. This means that there are high potential profits to be extracted from the market if competition is limited. As a result, the incentives to exert market power are high. These concerns are underlined by the results of the market model MARS, developed by the Danish system operator Eltra. According to modelling results there is ample scope for exerting market power. A hypothetical inter-Nordic merger will increase the scope for exerting market power in certain high load periods. Furthermore, the model shows that generators have incentives to exert market power in low demand hours by withholding capacity. One important aspect of the results from the simulations is that practises with negative effects on competition originating in one country may have negative ripple effects in the entire Nordic region. 7.2 Possible Pro-Competitive ActionsThe production capacities of the major producers are concentrated in separate areas. Therefore, the Working Group believes that further increases in concentration would give rise to competition concerns, because of the possible negative effects on competition and consumer welfare. Each merger case must, however, be analysed on its own merits. With respect to short-run exercise of market power the concerns are most predominant regarding mergers between producers with flexible production technologies. Competition authorities should work towards including the effects of different production technologies in their analyses. One or two major producers dominate all national markets. The large extent of cross-ownership is an obstacle to well-functioning markets. Cross-ownership reduces firms' incentives to compete and creates a forum for anti-competitive information sharing. The ability of competition authorities to intervene in acquisitions of minority shares is limited. In particular, competition authorities do not have the authority to order divestment of share holdings, except as a condition for accepting another acquisition of companies. The Working Group recommends that the relevant national authorities should consider if and how more procompetitive company and ownership structures could be created. The Working Group would like to point out that the transmission lines are not always fully utilised, confer section 1.2.1. The scope for exerting market power would be lower if effective utilisation of the lines is increased. Transmission system operators should endeavour to increase the effective capacity utilisation of the transmission grids. Investments in new transmission capacity may also lower the degree of market power – though not eliminate it. One important procompetitive action is that the transmission system operators should pay due attention to competition considerations in investment analyses of new transmission capacity. The reason is – among other things – that even a small increase in transmission capacity can have large effects on the market due to effects on competition. However, the Working Group would like to stress that one of the major advantages of markets with functioning competition is that inefficient investment in new capacity is avoided. A promising supplement or alternative to new investments is to promote increased competition in the relevant markets. 7.3 Improved co-operation regarding competition policyThe exertion of market power in one part of the Nordic region will tend to have detrimental effects in other regions. While the effects are Nordic the competition authorities are national – provided that the EU/EEA competition rules are not applicable. When national competition authorities handle mergers and anticompetitive practises there is a risk that the overall effects will not be taken into consideration. The Working Group would like to draw attention to the Guidelines for cooperation and the Nordic agreement on exchange of information. In the Guidelines the competition authorities are called upon to inform each other of any actual or potential cases liable to cause detriment to competition in another Nordic country. When investigating the same or linked cases the competition authorities shall seek to co-ordinate their activities. The implementation of the Nordic agreement is important for the development of efficient co-operation on competition law enforcement in the power market. The procedures should be implemented that will enable involvement of the Nordic national competition authorities in the handling of cases with effects in more than one country. The Working Group recommends establishment of an inter-Nordic working group. The group should meet regularly with the aim to exchange views and promote harmonisation of the analytical framework. The working group should develop competition policy analyses of the power market, giving special note to the use of market modelling and other methods for analysing past and future market behaviour. The Nordic group should not be a closed forum but invite other European competition authorities to participate when relevant. Furthermore, it is recommended that Nord Pool, the Nordic energy agencies, financial and competition authorities develop closer co-operation in order to exchange information concerning the market. Fodnoter[36] Calculating the various HHIs for the Danish markets does not give a fully realistic indication of the extent of market power, confer chapter 3.6. [37] According to the 1992 U.S. Merger Guidelines, confer chapter 3. Version 1.0 October 2003 • © Danish Competition Authority. |