Month: October 2012

Just when we thought that Russian/European energy adventures could be left to simmer away in Brussels… here comes the announcement that BP has disposed of its 50% interest in TNK/BP in exchange for Rosneft shares.

http://www.bbc.co.uk/news/business-20030610

Given the importance of the oil reserves existing in Russia and, consequently, of the rather convincing justification for BP (just as, it could be evisaged, for any other energy company) to keep a strong foothold in the region, one could be forgiven for thinking that BP's move may actually be a "good idea".  It would pretty much guarantee a continuous source of oil supply for a company who's been through mixed fortunes lately: starting from the oil spill in the gulf of Mexico to its fitful, to say the least, relationship with its own partners in TNK, BP's recent history can easily be defined as chequered to say the least.

However, the picture is not as clear or straightforward as it looks like.  Rosneft is a company controlled by the Russian State and Mr Putin has made no mystery of his wish to remain closely involved in its management, to the point of being briefed ahead of the TNK/BP deal.  BP's life as a partner in the joint venture has not been the happiest or quietest either: in 2008, its chairman (now at BP) Bob Dudley, had to leave the country following a number of run-ins with Russian authorities as well as with its own partners in TNK. To cap it all, the joint efforts made by TNK/BP and Rosneft itself to start drilling in the Arctic region faced intense opposition by other Russian oil producers, and were eventually abandoned.

So, what can be gained from a similar merger? And what does this mean for competition in the energy industries and especially for rivalry on the oil marker? There is little doubt that energy supply in Continental Europe, despite growing capacity in the gas segment, remains significantly dependent on oil. Oil is especially important in other economic sectors, such as transport: consequently, it could be argued that BP's move toward greater corporate and ownership-based integration with Rosneft represents a rational response to an ever changing and deeply challenging industry.  As was reported by the Financial Times on 22 October, this concentration is likely to harbor significant" benefits for BP shareholders, in terms of exposure to one of the world largest oil companies", productive sinergies and the ability to tap in extremely extensive and thus valuable oil reserves (see: http://www.ft.com/cms/s/0/9776a77a-1c39-11e2-a14a-00144feabdc0.html#axzz2AOdVeWmx).   However, it is legitimately questionable whether similar enthusiasm can be expressed when one looks at the potential consequences for the accessiblity of the oil market in vast areas of continental Europe.

It appears in fact from the details available as to the deal that the merged entity will maintain a hold on the supplies directed to numerous Member States, starting from the three Baltic Republic; in addition, it will own or enjoy exclusive rights to use key infrastructure (such as that allowing for the exploitation of rich Arctic oil fields).  The merger is also very likely to boost the battered reputation of BP, especially after its poor dealing with the consequences of the Gulf of Mexico oil spill.   However, it is equally clear that any rival wishing to threaten the leading position of Rosneft after the concentration will have, at the very least, significant difficulties in accessing much of the Continental market.  On 22 October 2012 Businessweek reported (see: http://www.businessweek.com/articles/2012-10-22/bps-good-deal-with-rosneft) that as a result of its takeover of BP/TNK, Rosneft will pull neck-and-neck with Exxon Mobil, which to date has been the most significant competitor when it came to access of the Russian reserves, on the one hand, and of European customers, on the other hand.  As a result, not just Exxon, but also other key rivals will be more and more sidelined when it comes to attempting an entry into the rich Russian oilfields: for instance, deals such as the Arctic/Black Sea drilling jointventure that exxon itself negotiated with Rosneft in late 2011 are to become less and less likely, due to the fact that, given the sinergies created with the BP-co-owned company, Rosneft will see lesser and lesser convenience in seeking out other partners.  As was aptly put by  Pavel Molchanov, a US based analyst, as a result of this deal, BP has been "officially endorsed" as the preferred partner" for Rosneft, which means, in practice, that it will retain a very privileged position, vis-a-vis other potential entrants, in securing both access to Russian oil and rights to exploit the oilfields with a view to exporting oil to countries in Europe. See: http://www.businessweek.com/news/2012-10-22/russia-off-limits-to-big-oil-after-bp-wins-putin-s-approval

As a result of this merger, the oil market in Continental Europe, whose dynamics affect oil availability and oil prices across the EU, appears more and more concentrated.  Due to the dependency on Russian-held resources, the consequences of the merger are likely to be felt in many Member States, with non-Russian companies in a position of increasing disadvantage vis-a-vis BP when it comes to securing supplies and to channeling them to other areas of the Continent.  The merger also raises significant questions concerning governance: it is in fact well known that Rosneft, in its position of state-run oil company, is very exposed to the political influence of the Russian Government and Presidency.  Consequently, a number of concerns were raised that BP's own internal governance may also be exposed to similar influences or threats thereof.  more generally, it may legitimately be questioned whether the merger could remain consistent with another objective, which has been at the core of among others the EU's policy agenda on energy, namely the attainment of "real" privatisation and of greater, easier access to the energy markets (see e.g. http://ec.europa.eu/energy/infrastructure/strategy/2020_en.htm). 

In the aftermath of this merger, several analysts have suggested that the Kremlin seems to be poised toward the "re-nationalisation" of the extraction industry.  Ostensibly out of a concern for keeping oil and gas "Russian" and "Moscow-centric", this deal seems to confirm the intention of the Russian State to tighten its hold on strategic oilfields while at the same time continuing to trade with foreign customers via a "trusted" ally, such as BP.  Gone are the days, it would seem, of the Russian "oligarchs" who, in the wake of the fall of the USSR were poised to become the free-market heroes of modern, post-Communist Russia (see e.g. http://news.bbc.co.uk/1/hi/business/3218515.stm).  Leaving aside the "historical" background, it may be genuiney questioned whether the merger between BP/TNK and Rosneft is going to herald an era of less expensive, more easily available oil to be sold in vigorously competitive markets.  Certainly, BP stands to benefit from his "special position" in the eyes of the Kremlin… but whether this will lead to a more contestable market in Europe in the long run, at least as far as onshore drilling and extraction go, it is highly doubted.

The energy sector has represented a key target for the competition enforcement activities of the EU Commission for a considerable time.  This activity has accompanied and in some cases followed the enactment of legislation designed to liberalise the markets for the supply of gas and electricity, through the imposition of unbundling and infrastructure sharing obligations on incumbents (often former state monopolists).  While sector specific regulation has undoubtedly been effective in removing barriers to entry and in creating the conditions for a more contestable market in many member states, it has not been wholly successful in curtailing the ability of incumbents to seek to shape the conditions of competition on the retail markets in a way that could be detrimental to newcomers, for instance by downgrading the conditions of access to the infrastructure or by seeking to tie customers via long-term arrangements, not just on the retail market, but also at wholesale level.  Competition decisions adopted since 2006 and addressed to major European former monopolists such as Distrigas in Belgium, RWE and E.ON in Germany and EdF in France show that ex post competition enforcement is an indispensable complement to sector regulation since it prevents the old monopolists, which invariably, at least for a time, are dominant on their respective relevant markets, from countervail, via their commercial practices, many of the positive effects of the liberalisation measures.

Yet, it appears that the road toward realising efficient, competitive markets in which energy is affordable as well as secure is rather uphill.  The recent statement of objections issued bythe Commission against the Russian energy company Gazprom (see http: //europa.eu/rapid/pressReleasesAction.do?reference=IP/12/937), alleging a number of infringements of Article 102 TFEU, especially to the detriment of customers in Central and Eastern European Member States, represents a good example of how "national champions", whether established within the Union or, as is the case with Gazprom, in non-Member States, can act in such a way as to foreclose the energy markets vis-a-vis rivals and thereby engender situations of dependency as regards supply in sizeable areas of the single market.  

A very extensive and exhaustive run through the Gazprom investigation and related matters is provided by a recent paper authored by Alan Riley, Professor of Law at City University and Fellow of CEPS at: http://www.ceps.eu/book/commission-v-gazprom-antitrust-clash-decade.  As is well known, Gazprom stands accused of partitioning markets, of applying "unfair prices" and of "preventing the diversification of the consumption of gas", to the detriment of EU consumers, viaa number of prima facie illegitimate practices, such as restricted access to the infrastructure (namely, the well known pipelines carrying gas from Central Russia and the Caucasus to more Western parts of Europe); dowgraded levels of service in transporting gas to Central and Eastern Europe; the practice of concluding long-term contracts of supply with a number of companies established in several member states in this and other areas.

These allegations present a number of difficulties, especially in terms of evidence, for the Commission: taking the allegation of "unfair pricing", this is admittedly fraught with problems.  For instance, how should an "equally efficient" rival be identified? And how high (or low) should a price be to be "unfair"? As to the other allegation of market partitioning this may admittedly be slightly easier to support with evidence: a careful analysis of pricing trends across the Member States concerned, for instance, could give the Commission clues as to whether a similar accusation is well founded.  But, assuming that the Commission is successful in gathering evidence and making a convincing case as to the existence of an infringement, could a prohibition decision, backed by fines, be the most appropriate way of terminating the infringements? As may be easily recalled, Gazprom, given its economic strength and, let's face it, its political adherences with the Putin regime, is admittedly notorious for the threats to interrupt or restrict supply of gas.  This has already occurred a few years ago against a number of its key customers (see e.g. http://www.bbc.co.uk/news/10362731). Accordingly, it could legitimately be questioned whether taking such a "heavy handed" strategy may be helpful, especially since (as the example of Lithuania shows-the country is 100% supplied by Gazprom) it would still be essential to maintain ties with the company in question, at least until such time as alternative sources of energy, especially renewable, are found and developed and thereby brought in a position of being capable of withstanding demand. 

As the experience emerging from the energy market study showed, commitments decisions, designed to put an end to the anti-competitive practices under a degree of supervision, may represent an equally efficient response to the consequences of unlawful behaviour.  However, this response presents inevitable risks, the first being the fact that it would not be based on a conclusive finding of infringement and the second, and perhaps the most significant, from a practical standpoint, being the fact that the efficacy of commitments decision relies heavily on the ability of the competition authorities to monitor compliance with them.  Perhaps it could be wondered whether the Commission would be better advised in "chancing" its way through a full-blown investigation procedure, culminating with a "real" response to Gazprom's suspected unlawful practices. It is suggested that taking this course of action would allow the Commission to exercise not just its detection powers, thus being able to reach a definitive decision that an infringement has actually taken place.  It would also enjoy the power to impose remedies on the investigated company, which would allow it to address the concerns identified already at this preliminary stage, along with imposing financial penalties.  As Microsoft has demonstrated, Article 7 can be deployed both flexibly and effectively to terminate the infringement as well as to allow rivals, who would otherwise be foreclosed from the market as a result of the dominant undertaking's misdemeanours, to be put on a more even footing in attempting to enter that market. Accordingly, it would definitely represent a more effective response to the consequences of Gazprom's behaviour in particular as well as being consistent, more generally, with the concerns for improving on openness and rivalry of the energy markets, goals in the realisation of which the Commission has invested significant resources as well as political capital.

But alas, the woes for policy makers arising from the energy industry are not limited to the action of the European Commission.  It appears that the UK Government, ostensibly out of a concern for growing gas and electricity prices, is preparing to legislate in order to "force" energy suppliers to apply their "lowest" tariffs to their customers' bills. At PM questions on 17 October the Prime Minister said: ""I can announce… that we will be legislating so that energy companies have to give the lowest tariff to their customers, something that Labour didn't do in 13 years, even though the leader of the Labour Party could have done because he had the job." (see: http://www.bbc.co.uk/news/uk-19986929) 

However laudable the objectives of the PM may be (especially given the ongoing difficulties that many families face in payihng their utility bills and the rising numbers of households in "fuel poverty"), this announcement rings many alarm bells in the ears of any competition lawyer.  What is meant by "lowest tariffs"? According to which benchmarks can this assessment be made? And secondly, how can it be ensured that, purportedly in order to fulfil their obligation under the proposed Energy Bill, suppliers will not conspire in their determination of what is the "lowest tariff"?

In respect to the first question, it is surely indispensable that suppliers should be "transparent" as to how their tariffs are calculated so that customers can compare each offer and thereby make an informed choice as to which firm to choose.  However, how in actual fact each tariff is determined remains very much within the gift of each supplier and is therefore determined on the basis of confidential information.  Against this background, it is clear that what appear to be "lowest tariffs"may not actually coincide with "competitive" tariffs, that is with the lowest prices that can be set having regard to the actual conditions of competition, of the size and number of rivals and of any other relevant factor characterising the industry at a given time.  It could be added that such a scenatio brings back to memory one of the most famous problems in competition law, namely the so-called "cellophane fallacy", which, it was alleged, had marred the US Supreme Court decision in the DuPont case. Be as it may, it is surely questioned whether imposing such a generalised obligation on suppliers, in the context of a market that is already subjected to significant regulatio, is really likely to benefit consumers, as well as being objectively feasible.  To the contrary, and coming to the second question highlighted above, the concern may well be raised that imposing such a blanket obligation woul restrict competition between suppliers considerably, as well as pushing smaller ones into a potentially unsustainable position of having to "meet competition" on the part of the major energy companies by, in substance, ending up pricing almost at a loss. 

In a very recent blog post (see: http://competitionpolicy.wordpress.com/2012/10/19/the-likely-effects-of-compelling-energy-firms-to-give-customers-the-lowest-tariff/#more-790), Catherine Waddams, of the Centre for Competition Policy at UEA, said: "Since any offer which a company made to try and encourage switching would oblige them to lower all the charges they make to their established customers, we would not expect to see very many offers.(…) A  small new competitor, with perhaps 100,000 consumers (less than half a percent of the market), would face a cost of £2million from lost revenue with existing accounts if it offered a twenty pound discount to attract new customers." Consequently, it could be argued that the obligation to bring all customers on the "lowest" tariffs would not only repress competition on the retail market, by producing a "bird-mirror effect" and thereby encouraging all energy suppliers on to a nigh to uniform price to their end users.  It would also be detrimental to the commitment to encouraging new entrants in the industry: it may legitimately be expected that any benefits arising from attracting new customers would be more than compensated with losses in revenue which may be very difficult to offset, especially given the high fixed and wholesale supply costs associated with energy production. 

In light of the above, it may be argued that the PM's announcement is at odds with the Government's commitment to both a more diversified energy supply side and a wider pool of energy sellers more generally.  If this position, with all the difficulties it is fraught with, is compounded with the Chancellor's retrenchment from the Exchequer's financial support toward "green" energy, it is easy to see how some commentators may have been justified in branding this latest Prime Ministerial announcement as"confused" (see for example, in the Guardian, http://www.guardian.co.uk/environment/2012/oct/18/coalition-energy-policy-lowest-tariff?intcmp=239).

Thankfully for Mr Cameron, his Energy Minister was ready to "take it on the chin" and issue a rather more anodyne statement on these issues (see http://www.guardian.co.uk/business/video/2012/oct/18/energy-secretary-lowest-tariff-video?intcmp=239).  Ed Davey emphasised the pivotal role of competition among suppliers and easier switching, the latter backed up by fuller information as to the competing offers available to consumers and by safeguards against "abusive commercial practices" (such as those emerged from door-to-door selling in the past), as the lynchpin of the energy market for the UK in the future.  However, he was silent as to the obligation to bring all consumers on the lowest tariffs-something that could potentially be interpreted as a sign that the PM's declaration had not formed the subject matter of deep cabinet discussion.  To all this the OFGEM response, issued at 7am on 19 October, adds further colour (for a good sum up, one can refer to, inter alia, http://www.guardian.co.uk/money/2012/oct/19/energy-firms-customers-cheapest-tariff).  In a key that was not verty different from that characterising the Minister's views, the sector regulator emphasised the need to have a clearer, much more linear and easier to compare set of tariffs. The Office seeks to put an end to an excessively wide variety of prices and to move toward simpler bills and up to 4 only tariff tiers.  OFGEM also plans to oblige suppliers to inform customers as to the available tariffs and to bring to their attention any more advantageous deal.  However, as is clear from its announcement (see http://www.ofgem.gov.uk/markets/retmkts/rmr/consumers/pages/index.aspx?&utm_source=homepage&utm_medium=banner&utm_campaign=simpler_clearer_fairer), it stops short of obliging suppliers, tout court, to "move" customers on to the lowest available rate-unless in the rather exceptional case of a "vulnerable" client whose tariff was "dead", i.e. no longer on offer.

So, too much ado about nothing? It could be argued that Ofgem's announcement, together with the urgent answer given by the junior Minister for Energy, John Hayes, to the Commons yesterday, confirm the existing commitment to securing more effective competition on the energy market, via provision for simpler tariffs and easier switching for individual users (see http://www.guardian.co.uk/politics/2012/oct/18/energy-minister-cameron-hot-air?INTCMP=SRCH).   however, arguably this debate raises deeper questions for the existing Government's energy policy: it would appear that energy is fast becoming another thug of war for the Cabinet, i.e. another instrument for "grabbing headlines" and try to win over "easily" consensus via well-sounding but not very thought through announcements, which require quick backtracks from other Ministers and, as is the case in respect to energy prices, the energy regulator.  It is suggested that this view seems confirmed by the fact that earlier today Mr Cameron, speaking from Brussels, far from either glossing over or indeed correcting his views on this issue, chose to renew his commitment to the "switch to lowest tariff" solution, but only as part of the debate concerning the new Energy Bill (see: http://www.guardian.co.uk/money/2012/oct/18/david-cameron-energy-bill-tariff-plan).  Admittedly, this does not promise very much for a debate that would require much clearer direction and, more to the point, far stronger grounding in competition principles and evidence based policy- and law-making.

 

If it was a TV series, we could safely say that we are watching the second instalment of the "story" of Scottish legislation introducing minmum prices on alcoholic beverages.  The end of September saw the EU Commission stating that "it had a problem" with these measures: in line with established case law the Commission expressed the view that setting a minimum prices for alcoholic beverages would not comply with the free trade and competition principles enshrined in the EU treaties (see http://www.bbc.co.uk/news/uk-scotland-scotland-politics-19757149). The Commission's letter, which also takes stock of concerns expressed by a number of wine-producing Member States, is still confidential: however, many of its possible concerns and arguments can be guessed. The 'by object' illegality traditionally attached to minimum pricing; the concern for making the Scottish market "less appealing" to foreign vintners and  therefore for hampering imports into a sizeable part of the UK; and, perhaps more interestingly, the perception of these measures as "going beyond the pale" compared with other measures, such as the adoption of indirect taxation measures affecting alcohol trade are all likely to feature prominently in it.

So, what happens next? The Health Secretary for Health, Alex Neale, who has replaced Nicola Sturgeon in the last reshuffle, has confirmed the Scottish Government's commitment to these measures; He has also reiterated that the Government would "respond" to the Commission's letter within the next 3 months.  After that deadline of 27 December, the ball will be once again in the Commission's court: will the Commission bring an action for infringement in respect to this piece of legislation? Or will it take the view that it's discretion is best engaged in pursuing other alleged infringements of equally weighty EU law rules?

The Scottish Whisky Association certainly hopes that the Commission, if it is not able to "negotiate" the repeal of the legislation with the Scottish Government in the period of time intervening between now and 27 December, will indeed take the United Kingdom to Court, in respect to the prima facie infringement of the Treaty arising from the conduct of one of its regions.  And it is equally clear that the UK, as the Advocate General, Lord Wallace of Tankerness, has said today, will "stand shoulder to shoulder" to the Scottish Ministers in defending their actions before the EU judiciary (see: http://www.bbc.co.uk/news/uk-scotland-scotland-politics-19779696).  But it simply not clear how easy it will be for the UK to do so. 

There is little doubt that the measures enacted by the Scottish Parliament are problematic: minimum pricing has traditionally been regarded as something akin to "vertical" minimum pricing. Especially if these restraints on the freedom of determining prices are applied in specific areas of the Union, they have also been considered a major obstacle to the realisation of the objective of market integration.  As was held by the Court of Justice of the EU in a number of judgments, any limitation on the freedom of individual firms to set their own prices, especially in the form of a "floor price", automatically hinders their ability to pass on efficiencies to their customers, in the form of lower prices (see e.g. case C-221/08, Commission v Ireland, [2010] ECR I-1699).  As a result, in the Court's view it is likely to prevent "efficient traders" from doing business in areas where similar measures are imposed by domestic legislatures, and this regardless of the policy objectives pursued by them.  This much the Court of Justice has reiterated in cases relating for instance the trade in tobacco products. 

The SWA and the "wine producing" member states that have so far submitted papers to the EU Commission take heart from the traditional position on  geographic minimum pricing and also on the principles enshrined in the "tobacco" litigation, in which the "common market goals" seem to weigh more than the concerns for public health.  However, one key factor  at stake in the tobacco cases was the existence of extensive harmonising EU legislation in the area, legislation which had been enacted after taking into careful account the public health concerns arising from this type of trade.  Similar measures have not however been adopted by the EU legislature in the field of trade of wine, spirits, beer and other alcoholic drinks.  It is also clear from the history of the Scottish legislation that the latter envisages a system of pricing that takes into account the different strength of individual types of beverages, thus giving rise to differentiated prices; it is also based on sound health evidence (i.e. the Sheffield study, see: http://www.scottish.parliament.uk/parliamentarybusiness/28862.aspx?r=6852&i=62104&c=1284513) as to the social and medical harm caused by excessive alcohol consumption an to its economic costs.  

Against this background, could the system of minimum pricing provided in the Scottish legislation be regarded as a "disproportionate" restraint on competition and on free trade, as alleged by the SWA? In an earlier post on this Blog, I recognised that price competition is so important that it can never be eliminated (see: http://www.law.ed.ac.uk/clie/blogentry.aspx?blogentryref=8929).  However, could the legislation in question be viewed as a framework within which a different type of competition-one arising, perhaps, between different types of drinks or between beverages of a similar nature but having different alcoholic strengths-can arise?

Perhaps more importantly, the question that should be addressed is whether we should be protecting the "cut price" sellers of, for instance, high strength lager or cider, who can market these products for less per pint than mineral water: it may be queried whether these are the "efficient" undertakings that should always and at all costs be allowed to "pass on" their alleged efficiencies (which could be suspected to originate from cross subsidisation with income coming from sales of different products) to their customers, regardless of the social and economic harm arising from the impact of these sales.  In this specific respect, one dictum of the "tobacco judgments" that are much trusted by the SWA but that the Association seems to have overlooked is the following: "(…) it is (..) open to [the Member States], while allowing those producers and importers to make effective use of the competitive advantage resulting from any lower cost prices, to prohibit the sale of manufactured tobacco products at a price below the sum of the cost price and all taxes (…)" [emphasis added] (case C-198/08, Commission v Austria, [2010] ECRI-1645, para. 43).

Against this background, it could be wondered whether the "differentiated pricing scheme" de facto enshrined in the Scottish legislation could allow such "advantage" to be effectively used by "efficient" vintners and brewers while at the same time allowing Scottish authorities to prevent the sales at below-cost prices that are not only damaging public health and public order (not to mention the economy!) but also undercutting the public purse, by resulting in the tax authorities being unable to reap their revenues (see e.g. C-197/08, Commission v France, [2010] ECR I-1599, para. 43) on the sale of ultra-cheap products.  It is submitted that, if the Commission decides to take the UK to court on account of these measures, this question may well be one of the issues on which the Court of Justice could decide to focus on, in addition to considerations relating to how to balance the public health gains pursued by the Scottish Parliament against the demands of genuine competition which, it could be argued, may well arise between different products and therefore ensure that rivalry is not irremediably impaired on the market.

Finally, and to go back to the main story… where does this leave the complainant, i.e. the Scottish Whisky Association? Could they be actually regarded as potential "victims" of the cut price sales of alcoholic beverages that seem to be the target of the recent minimum price legislation? Admittedly, this is a question that needs to be answered in the circumstances-what beverage can be regarded as substitutable to whisky? And how easy or difficult is it for spirit producers coming from other member states to enter and establish themselves on the Scottish whisky market? More generally, could an "efficient distiller" be prevented from "passing on" his or her efficiency gains to consumers by the minimum price level calculated on the basis of the method established by the Scottish legislation?  It is uncontestable that setting minimum prices is liable to raise concerns for the genuinity of the rivalry in any market.  However, it is admittedly difficult to find as unlikely a substitute to single malt whisky as the beverages that are commonly sold at the "slashed" prices that can currently be seen in some off-licenses.