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Brussels Shows Muscle on Protecting Energy Competition

Call me a Euroskeptic, but in recent years I have become accustomed to watching many, if not most, controversial policy initiatives go before Brussels only to die, caught up in a web of extravagant bureaucracy that would make even Kafka shudder. Easily the most polemical proposal in recent times concerns the common policy on energy competition and regulation – an initiative seemingly doomed to fall victim to fatal inaction.

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Perhaps that’s why I was astonished to find myself applauding yesterday’s presentation of a new package of EU energy policies (click here to see the publicly available official documents), calling upon several of Europe’s largest energy monopolies to sell off their electricity and gas distribution assets, and institute other measures to “remove obstacles” from energy competition. The real kicker of the new plan: non-EU companies would only be able buy transmission and distribution assets if they sign treaties with the EU (the Energy Charter comes to mind) to guarantee the unbundling requirements, and provide free market access for similar acquisitions in their home countries, among other provisions. Bravo, President Barroso! This is the most impressive news out of Brussels in quite some time, and it sends a real wake-up call to Russia that Europe is sick and tired of the disaggregation game. According to one EU diplomat interview by the Wall Street Journal, “The attitude in the council [of EU member states] has changed enormously. … A lot of countries are now trying to underline the need to have one voice in relations with Russia, which wasn’t so before.” The message is clear: It’s time to begin a real conversation about a fair and equitable energy trade. I suppose I should not have doubted the dedication of EC Energy Commissioner Andris Piebalgs and Competition Commissioner Neelie Kroes to see the unbundling issue through, although I am expecting this proposal to receive vigorous political opposition from Gazprom, with the assistance of France and Germany. Prepare yourself for a real war of rhetoric on this issue, as these titans of the energy industry make their pitch to protect their monopolies. First, we can expect Gazprom’s PR machine to hit hard and hit fast, just like they have been doing over the past year on this issue (oh wait, they’ve already responded! Accusing Europe of bringing down “The Energy Iron Curtain“). Gazprom will want to present this as a tit-for-tat type dispute, and paint themselves as victims of unfair suspicion in a familiar narrative that we have seen elsewhere. They will point to their record as a reliable supplier which is now become subject to the protectionism of a Russophobic bureaucracy. (never mind that Gazprom is staunchly against liberalizing the Russian energy sector.) And in many respects, Gazprom’s arguments are going to be quite convincing. As the supplier of 25% of Europe’s natural gas, any comprehensive EU energy plan must naturally include active and significant Russian participation – to suggest otherwise is simply fantasy. And even though there are many recent examples of supply disruptions due to political interference in the energy trade from the Kremlin, that is aside from the point. This new package of energy policies is not about punishing Russia, nor is it a technocratic revenge fantasy against E.ON or EdF. As President Barroso said during the presentation of the new rules, “We must not be naïve. Fair competition is different from protectionism. … We need to protect the internal market from noncompetitive behavior coming from elsewhere.” The new policy is about rules and about monopolistic abuse – and these rules exist for a reason. Gazprom and the Kremlin unfortunately would have a tough time denying that they don’t often break rules, violate contracts, breach treaties, abuse market position, and politically manipulate importing countries – the laundry list of egregious examples need not be repeated here. I spent the morning in Brussels today speaking with some MEPs who were even of the opinion that Russia, in some senses, enjoys the bad reputation they have earned, as they have successfully lowered expectations so far that Europe is pleasantly surprised with even the smallest of gestures. However being the “bad boy” of the energy sector also has its costs – their conduct over the past number of years has brought this about. We also have to look at the general trend of Europe aggressively asserting consumer rights. If you are looking for any indication that demonstrates where the winds of change are blowing in Brussels, you may also take note of another major anti-trust decision that recently came through concerning a little American software company called Microsoft. On the very same day as the new energy package presentation, Competition Commissioner Kroes also offered a powerful rebuttal to US criticism of the EC decision to impose a fine on Microsoft for abuse of market position: “It is totally unacceptable that a representative of the US administration criticised an independent court of law outside its jurisdiction. The European Commission does not pass judgment on rulings by US courts and we expect the same degree of respect.” As German Chancellor Angela Merkel pointed out earlier this year, Gazprom should consider it “an honour to be treated like Microsoft,” and others have commented that indeed the Russians may be somewhat confused to be dealing with a competition authority that they can’t politically manipulate.

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Illustration by David Simonds (Economist)

So at this early stage, I think we are just looking at a best case scenario and a worst case scenario. In the best case scenario, Barroso, Piebalgs, and Kroes will continue to promote unbundling, possibly gambling their careers on the issue, and succeed in the very least by getting Russia to ratify the Energy Charter Treaty, allowing them to own some distribution assets, and normalizing the oil and gas trade through a non-political rule-based system. Even in the best case scenario, I think E.ON and EdF are far too strong to be taken apart by Brussels, and, at the most, they may give in to having their grids and pipelines partially owned and operated by third parties. Europe can protect itself from the abuse of this one particular Russian administration without necessarily having to totally break apart its national champions. In the worst case scenario, this policy package is just a ruse to get the Russians to offer a greater degree of reciprocity – something that with a lot of pressure from the French and German governments could put a token number of assets into European hands, yet make no positive impact on Russian rule of law. Analyst Katinka Barysch has argued that this is a pointless matter in terms of energy security given the fundamentally different conception that Europe and Russia have over the reciprocity issue. Let us not forget that in coming months, the greatest threats to European energy security are not coming from the Kremlin (which frankly may be a bit preoccupied maintaining stability before the election), but rather from France and Germany (and possibly some help from Italy). EdF and E.ON are extremely unlikely to see the benefits of allowing competing energy companies access to the grids and pipelines, but with luck, the citizens of France and Germany will stand up and not allow their governments to trade security to maintain monopolies.