The Quest for Gas Market Competition

More, not less, competition in the EU’s gas markets is required to achieve a Single Market and to therefore reduce Europe’s vulnerability to gas supply cuts originating in Russia. In particular, the East-West divide within the EU in terms of competition policy revealed in this paper must be overcome.

The authors investigate the relationship between the level of competition in the gas markets of the EU member states and their vulnerability to supply cuts from Russia’s monopoly company Gazprom, which is behind most of the recent gas supply disruptions in the EU. Most markets in Central and Eastern Europe are locked into a tight one-way relationship with Gazprom, not only as sole supplier of gas, but also as investor in the domestic markets, and through long term supply contracts. All incentives in the local gas markets are skewed in such a way as to favour Gazprom. Based on these insights, the paper launches a new “Index of Vulnerability to Gazprom Supply Cuts”. The scores of the individual EU member states in this index show that the more the national gas market structure it monopolised, the greater a country is likely to suffer from gas supply disruptions.

The paper further takes a close look at the legislative measures and antitrust actions undertaken by the EU to foster such competition. It examines Brussels legislation moves to liberalise the EU’s gas markets since the 1990s. The failure of these policies to foster sufficient competition in the markets led to the ambitious Third Energy Package. The Energy Package, adopted in 2009, attempts to introduce “full ownership unbundling” – a complete break-up of the existing vertically integrated gas majors – because increasing evidence shows that this is the only effective means to foster competition and thus improve customer service, reduce consumer prices and provide a more liquid and flexible market able to respond to crises. The paper also has a closer look at current antitrust cases launched by the European Commission against some of the EU’s biggest vertically integrated gas companies in Western Europe. The cases concern “concerted practices” (cartels) and in particular the “abuse of market dominant” position. The company actions under scrutiny had as aim and/or effect to foreclose national markets. This foreclosure leads to insufficient investment in gas infrastructure such as pipelines and interconnectors.

An analysis of how the Commission’s regulations and antitrust actions have played out on the ground reveals that the Third Energy Package provides for exemptions to the ownership unbundling rules. It also includes the Third Option, a watered down unbundling requirement, which will not fundamentally change incentives for gas companies. These exemptions and the Third Option will mostly apply to Central and Eastern Europe, thus perpetuating the uncompetitive status quo. Furthermore, the recent antitrust cases have focused on those markets that are least vulnerable to supply cuts from Gazprom, although Gazprom has been behind most recent gas disruptions. The EC’s antitrust policy in energy has neglected the Achilles heel of Europe’s supply security, its Eastern rim, and in particular the new EU member states. This must change.

The paper concludes that the Commission’s priority on increasing competition in gas markets should be shifted to the East. In the short term, new legislation on full ownership unbundling of vertically integrated companies is not likely to be passed – political resistance is too strong. It is thus to Brussels’ antitrust action, and especially abuse of market dominance, that the greatest attention should be shifted. Particular emphasis should be given to countries that need it most, namely Bulgaria, the Baltic States, and Slovakia.