NEGOTIATED THIRD-PARTY ACCESS IN THE GERMAN ELECTRICITY SUPPLY INDUSTRY
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NEGOTIATED THIRD-PARTY ACCESS IN THE GERMAN
ELECTRICITY SUPPLY INDUSTRY
Gert Brunekreeft1
University of Freiburg, Germany
September 2001
forthcoming: Economia Della Fonti Di Energia E Dell'Ambiente
Corresponding address
Institut für Verkehrswissenschaft
University of Freiburg
D-79085 Freiburg i.Br.
Germany
Tel: (0049)-(0)761-2032373
Fax: (0049)-(0)761-2032372
Email: brunekre@vwl.uni-freiburg.de
URL: http://www.vwl.uni-freiburg.de/fakultaet/vw/lehrstuhl.html
1. Introduction
Germany opted for negotiated third-party access (nTPA) as the institutional frame for the
electricity supply industry (ESI). With this option Germany is the exception, because all other
EU member states opted for regulated third-party access (rTPA). The German option has
attracted both practical and academic attention and above all criticism, from inside and
outside the country.2 In Spring of 2001, the European Commission (2001a), presented a
proposal to modify the EU-electricity directive. One important modification was indeed to
omit nTPA as an option and instead concentrate fully on rTPA. This would have implied for
Germany to modify the sector-specific energy act, such that some agency would be authorized
to set or approve ex-ante network-access charges. Curiously, in a background document, the
European Commission (2001b) assesses the market developments in Germany as positive, but
does not hesitate to criticize nTPA. In contrast to general expectations, the developments have
been surprisingly good at first sight and only closer examination reveals that the system does
have its flaws; it is only recently that developments have turned negative.
This paper will attempt to characterize what negotiated third-party access means and how it
works out in the German ESI. Saying that there is no sector-specific ex-ante regulator does
not mean that there is no control. Negotiated TPA implies that the antitrust issues in the sector
are left to the cartel agency, whose control relies on the competition act. An important policy
turning point came in April 2001 with a review of network access in the German ESI,
1
The author would like to thank the editor for useful remarks.
2
The interested reader may be referred to Bergman, Brunekreeft, Doyle et. al. (1999) for a general overview and
discussion of liberalization of European power markets.undertaken by a task force of various cartel offices (Bundeskartellamt, 2001).3 This review
explicitly distinguishes between the level of the network-access charges on the one hand and
discrimination against third parties on the other hand. The review recognizes that the network-
access charges may be excessively high and explores the possibilities the competition act
provides to counter this. Notably, the cartel office, by authorization of the competition act, is
not allowed to set or approve the network-access charges ex ante; it can only intervene ex
post.
The paper is organized as follows. Section 2 will characterize the institutional frame. The
phrase "negotiated" means in practice that the industry worked out a framework for network
access, called the Association Agreement. Currently into force is the second version, which
will be described in some detail. The German ESI will be presented in section 3, whereas the
market developments will be characterized and assessed in section 4. Section 5 concludes.
2. Negotiated TPA
2.1. The institutional frame
The EU-electricity directive (96/92/EG) has been implemented into national law with the
Energy Act entering into force 29th April 1998.4 The energy act did not introduce fundamental
changes compared to previous legislation. The ESI in Germany has never been monopolized
in a strict sense (i.e. close to only one firm), as in e.g. England and Wales, Italy or France.
Monopolization in an alternative sense has been achieved by allowing cartelization among
various firms (pre-liberalization, about 1,000 asymmetrical firms). Cartels are prohibited by
clause 1 of the competition act,5 but the very same competition act made several exemptions
to the general prohibition, among which for the ESI. In practice, this worked out into a
comprehensive system of so-called demarcation contracts, which were binding and
enforceable agreements not to compete in each other's service areas. Cartels were thus
stabilized artificially. In the early proposals for a new energy act, the government thought it
should suffice to skip the exemption on the prohibition of cartels; hence, demarcation
contracts would be prohibited and thus competition would result from the potentially
competitive market. True as this may be for non-vertically related markets, in an ESI it
neglects the monopolistic networks. Competition in the ESI, however, was thought to be an
intra-industry affair, which would concern small, domestic end-users only indirectly. The
government held strong beliefs in the countervailing powers in the industry, which might
3
It may be recalled that Germany is a federation, where, apart from the federal cartel office, each state has its
own cartel office. Unless stated otherwise, the federal cartel office will be taken to represent the state cartel
offices.
4
Energiewirtschaftsgesetz (EnWG); BGBl. 1998, I, 23.
5
Gesetz gegen Wettbewerbsbeschränkungen (GWB).
2arrange things among themselves, while the government would take care of protecting the
small end-users. End-user charges for small (domestic and commercial) end-users have for
long been capped by a federal decree,6 which authorizes state-ministries to approve price
ceilings (or, more precisely, to check whether price increases are cost based). Paradoxically,
this decree is still in force, although it is generally considered to be non-binding. In fact,
various political levels have unsuccessfully attempted to abolish the decree. For remaining
antitrust issues (like network access), the cartel office was thought to be sufficiently powerful
to handle these.
This background sets the frame for the energy act 1998. Institutional changes to the previous
situation remained modest indeed, with one main exception: network access. Parliament could
not accept that a TPA-provision would not be taken up into the law and simultaneously, the
cartel office emphasized that the competition act as it was, would not be sufficiently strong to
handle network-access issues. As a result, a TPA provision was taken up into the energy act
(clause 6), explicitly stating that network-access conditions should be negotiated within the
industry, and more or less simultaneously the competition act was modified to include an
essential-facilities doctrine (clause 19(4)4, GWB, 6th version). The latter has been carefully
formulated to ensure that it is only applied to physical infrastructure; the target of the
essential-facilities doctrine was the ESI (and in the meantime, the gas sector), and not non-
physical infrastructure, say e.g., a newspaper distribution network.7 The essential-facilities
doctrine has two important elements: first, access to the essential facility should be granted in
a non-discriminatory manner and second, against a fair and reasonable charge. This one
clause has become the main regulatory instrument; the review of network access by the cartel
offices, mentioned above, focusses on precisely this clause with these two aspects. During the
first three years after liberalization, application of the essential-facilities doctrine concentrated
on the aspect of non-discrimination (e.g. the BEWAG-case). As of Spring 2001, however, the
focus has shifted towards the level of the network-access charges. The cartel office already
threatened to intervene in what it suspected to be excessively high network-access charges; in
response, the distribution network operator, E.Dis (which is a 100% subsidiary of E.On),
"voluntarily" lowered its charges. One more aspect is important; the review explicitly
mentions that the competition act does not allow the cartel office to set or approve network-
access charge ex ante; it is only authorized to intervene if a justifiable suspicion of an abuse of
market power can be shown, which is ex post by definition.
6
Bundestarifordnung für Elektrizität (BTOElt), 1990.
7
This refers to the Bronner-case settled by the European Court of Justice on 26. November 1998; EuGH Rs. C-
7/97 (Bronner), I-7791.
3TPA is not fully enforced in the former East. After reunification in 1990, the East German
generator VEAG was created which largely owns the lignite generation capacity and the East
German transmission network. In order to secure the production of indigenous lignite, VEAG
(and thereby its shareholders) had been obliged to modernize the lignite-fueled capacity by
investing a total sum of 20 billion DM until 2002. With art. 4 clause 3, the energy act
explicitly states that in the assessment whether refusal of TPA is deemed discriminatory, the
share of lignite in the production should be carefully taken into account.8 The legal basis is
that competition might unduely endanger the obligation to invest and thereby put a vast
number of jobs in the East German lignite mines at risk.9 Although the interpretation differs
among lawyers (cf. Theobald & Zenke, 2000), it is nevertheless clear that this clause allows
VEAG opportunities to refuse TPA.
In contrast to most other EU member states, Germany opted for complete eligibility as from
the start; at liberalization in April 1998 only the Scandinavian countries knew 100%
eligibility. As before, the previous frame appears to have been decisive. End-users were
"captives" by the demarcation contracts; i.e. by the agreements to stay out of each other's
service areas. In lack of another provision which might have closed the service areas, the
prohibition of the demarcation contracts thus made the end-users eligible de jure. If the
government had wished to close the service areas (i.e. constrain eligibility) up to, say, the
threshold values in the EU-directive, it would have had to include a corresponding provision
into the energy act explicitly. Since the government did not believe that retail competition for
small end-users would occur anyhow, it seemed rather redundant to take such steps.
Nevertheless, under political pressure from the states and communities, a provision was taken
up offering distributors were left the possibility to opt for a modified single buyer; no
distributor actually applied the provision.
Minimal modification of the previous situation also implied that the industry structure
remained unchanged. Horizontally, this is largely justifiable. Concentration in generation was
fairly low to European standards (cf. section 3), and concentration in retail was considered
irrelevant. Large industrial users, or power brokers do not need a retail stage and competition
for small end-users was not supposed to occur. More disputable is the unchanged vertical
industry structure. The degree of vertical integration was high and has been increasing in the
recent past. More importantly, two blocks of firms can be identified. A small number of
8
This clause expires at the end of 2003 with an option to be prolonged to 2005. The European Commission
authorized the clause with reference to article 24 of the Electricity Directive (cf. EC, 11.12.1999, Offical Journal
L-319/18).
9
It did not quite work out this way; modernization reduced the number of miners from 96,000 in 1989 to
20,000+ in 1994 (Hansen, 1996, p. 556).
4supra-regional firms (the so-called Verbundunternehmen), which are heavily integrated
between generation and transmission, and a large number of communal distributors, which are
vertically integrated in distribution (i.e. the network) and retail. Thus, whereas vertical
integration among the competitive stages (generation and retail) on the one hand and the
monopolistic stages (transmission and distribution networks) on the other hand is acceptable,
vertical integration among monopolistic and competitive stages is at least problematic.
Structural separation of the (transmission) networks would have required expropriation, which
was considered to be contrary to the constitution and thus not a feasible option. This may be
so, but it is also clear that the government never considered the vertical industry structure to
be a serious problem. The EU requirements concerning vertical unbundling (accounting
separation) have been implemented only minimally and have not been seriously applied up
until this day. Recently, parliament inquired the federal government about the lack of
enforcement of the provisions on accounting separation; in response, the government shifted
responsibility to the state ministries.10
The possibility of having a mandatory pool (similar to the former electricity pool in England
and Wales) has been discussed, but both the industry and the government refuted the idea.
Hence, bilateral contracting is the main trading mechanism, whereas simultaneously private
and voluntary initiatives for spot and future markets were allowed and promoted. In the
meantime, two spot markets have been established: LPX in Leipzig and EEX in Frankfurt.
Irrespective of academic controversy, recent developments in England and Wales (UK) and
California (USA) appear to support the government's decision for bilateral contracts and
voluntary spot trading.
2.2. The Association Agreement II
Negotiated TPA implies that there is no sector-specific regulator and consequently no ex-ante
regulation. Issues concerning network access, be it charges, be it other conditions, are left to
the industry, whereas the cartel office restrains abuse of market power. The industry
associations (i.e. the ESI, co-generators and large industrial users) have been required to work
out a framework for network-access conditions; this resulted in the so-called Association
Agreement (VV).11 After a false start with VV I, a significantly improved version entered into
force in December 1999 with VV II, while momentarily VV II+ is in preparation, which is
expected to come into effect at the beginning of 2002.12
10
Cf. BT-Drs. 14/5519 and 14/5733.
11
In German: Verbändevereinbarung.
12
At the moment of writing, unfortunately, no details are public yet. The name, VV II+, suggests that it will only
update the VV II, without significant changes.
5The first version of the association agreement, VV I, mirrors the attitude and expectations the
industry had towards the competitive potential of the power market; i.e. a severe
underestimation. It might be claimed alternatively, that the expectations were correct, but that
VV I was simply an attempt to hold off competition. As stressed above, competition was
thought to be an intra-industry affair. Some large industrial end-users and some
distributors/retailers would probably renegotiate their comprehensive, long-term contracts and
possibly even switch supplier. Within this logic, TPA meant making arrangements for a small
number of long-term contracts, containing large amounts of bulk power. Why set up a
comprehensive and expensive system, if the expected small number of requests for TPA can
be dealt with on a case-by-case basis? There is a flaw to this line of argument; the number of
requests was neither small, nor did it concern only long-term contracts. Especially traders
(like Enron, TXU), which were not directly represented in the association agreement, had
severe difficulties with the system and pushed hard to break it.
The main flaw in the VV I, in accordance with the logic explained above, was that it relied
upon the contract-path principle. Each trading contract had to be backed up by a request for
TPA. The network-access charge was basically a two-part tariff. First, a load-based fixed
charge calculated as a mean of the charges at the feed-in and extraction point. The load, for
which the charge was calculated, was contract-based, not connection-based. Second, a
distance-related (km) charge, for which the distance was calculated as a straight line between
feed-in and extraction point. The load and the points of feed-in and extraction, and thus the
distance, had to be specified in the contract; hence, the contract-path principle. Because the
network-access charges relied heavily on the specifications of the trading contract, the system
turned out to be cumbersome, intransparent and leaving options for the transmission system
operator (TSO) to manipulate the charges.
There were a number of other difficulties. First, the distance-related component clearly
advantages nearby power plants, which is an impediment to competition. Normally, the power
plants in a control area belong to one and the same firm (vertically integrated generation and
transmission). End users in this control area will thus find it cheaper to purchase power from
this firm, because it saves on the distance-related charge. Moreover, it lacks an economic
justification. Second, strong reliance on contracted load in kW (rather than energy in kWh),
creates a bias towards long-term contracts. Consider the following two options. In option one,
a trader could have a contract with a maximum load of 100 MW valid for the entire year. In
option two, the trader could have a 100 MW-contract for six months with supplier A and have
another 100 MW-contract for the subsequent six months with supplier B. In the first option,
the trader would have to pay the load-based charge only once, while twice in the second
6option. In both options, however, the amount of energy actually traded might be the same.
The problem with this is not so much the price structure in itself, but that it impedes the
development of spot markets, which by definition rely on short-term transactions. For every
transaction on the spot market, the trader would have had to pay the load-based charge. Spot
markets, residual quantities, reserves and imbalances, have turned out to be essential for fine-
tuning competitive power markets. Third, for outside observers (e.g. the cartel office) it is
close to impossible to assess the cost-relatedness of the level of the access charges, since it
depends strongly on individual contracts. It is possible to calculate examples (cf. e.g. Brattle
Group, 1998), but do these examples relate accurately to the real world? Only the TSO has the
overall picture.
Driven by criticism and market forces the system broke down and was replaced by the VV II
in December 1999. The VV II is a significant improvement and appears well-suited for a
competitive market. It relates to what appears to be the European standard. Reliance on the
contract-path principle has been omitted. Instead, the network-access charges rely on network
connection in the form of postage stamps. Only end-users and generators pay, according to
load and energy at the point of connection. Still, however, the generator/consumer-split is set
at 0/100; in other words, the generators do not (yet) contribute. The costs of higher-voltage
networks are cascaded to lower-voltage networks and finally to the end-users; i.e. a lower-
voltage network pays a connection charge, also based on load and energy, to the higher-
voltage network. The revenue allocation on the extra-high voltage level is negotiated among
the network operators, which implies that pancaking at this level has been avoided.
Obviously, the voltage level of the point of connection of an end-user is important; an end-
user connected at medium voltage does not pay for the low-voltage network. An examination
of published tariffs (see below) reveals that network-connection level is the main revenue
driver, which seems to correspond to underlying costs.
The VV II sets out the structure of the access charges in terms of maximum load and a
coincidence factor, which is calculated using load duration, which in turn relies on annual
energy consumption. In short, after recalculation, the access charges are presented as a two-
part tariff of which one part depends on maximum load (kW) and the other part on annual
energy (kWh). In practice, it turns out that the structure only modestly differentiates between
different user groups, whereas one would expect that the large fixed costs of networks would
allow more pronounced price discrimination between user groups. The network-access
charges in e.g. the UK,13 but also the end-user prices in Germany are far more differentiated.
13
In the UK, the fixed charge is a daily-standing charge which does not (or only indirectly) depend on load. In
the German system, the "fixed" charge increases with load and thereby modifies the degree of differentiation.
7Moreover, there is no explicit factor for peak-load pricing, which is remarkable because end-
user prices do usually account for peak loads. As figure 3 further below illustrates this implies
that larger users are faced with a higher share of network-access charges in the end-user
prices, which seems to be the wrong way around. Supposedly, this flaw in the price structure
will be repaired in VV II+.
There are no separate charges for energy losses. The energy losses are simply allocated to the
other network costs and passed through into the access charges irrespective of causation.
More efficient would be a cost-based system, but this requires something like nodal spot
pricing, real or virtual. Momentarily there is no reliable spot price to base the system on, and
installing a virtual system implies high transaction costs which may not compensate the cost-
savings (in terms of energy losses or postponed investment). Furthermore, there are no spatial
investment signals. In principle, the exact point of connection affects neither the generators
nor the end users, except that there are different network owners which may charge different
prices. Momentarily these points of criticism are of little concern. As mentioned, the
generators do not pay (yet), and thus all price signals, be it short run (energy losses) or long
run (investment) would only affect end-users, which does not seem to be very effective.
Nevertheless, as soon as generators start contributing, these minor drawbacks are a point of
attention.
Initially, the VV II included what was called a T-component. The extra-high-voltage networks
within Germany had been subdivided in a north-zone and a south-zone. If trading took place
from one zone to the other, a charge of 0.25 Pf/kWh was levied. The T-component has been
omitted as a requirement in the recent merger cases (VIAG & VEBA into E.On and RWE &
VEW into RWE).14 The merging firms must have known that they would have to sacrifice
something to get the mergers authorized; throwing out the T-component is one "sacrifice". In
fact, it might be conjectured that it was taken up to be able to sacrifice it in the first place.
To summarize the assessment of the VV II:
• The VV II is transparent; the network-access charges rely on data which concern the end-
users and not the supplier. A trader is not involved in the network-access charges. A trader
only pays for imbalances.
• The structure is no longer biased against short-term transactions, which allows the
development of spot markets.
14
The other firms agreed, although they were not (directly) involved in the mergers; consequently, the T-
component was abolished for the entire country.
8• On paper, there are no obvious points which appear discriminatory. Remaining issues
concerning tariff structure (generator/consumer split, two-part pricing, cost-allocation) do
have efficiency consequences, but are not discriminatory against third parties.
• There are ineffiencies in the price structure. In particular, the lack of an explicit peak-load
component seems an issue for improvement. Explicit and spatially differentiated charges
to set proper investment signals and handle energy losses also qualify for improvement.
• Lastly it should be emphasized that the VV II only concerns the structure of the network-
access charges; the level is determined by each individual network operator.
3. The sector
Since liberalization, the sector has seen significant changes. Mergers and take-overs, both
horizontally and vertically, have characterized the latest developments, increasing
concentration and reducing the number of firms. New firms and new institutions further
changed the electricity landscape. Although politics does not openly interfere in the market
structure of the ESI, there is the impression that the envisioned structure is an oligopoly with
four vertically integrated firms (i.e. RWE, E.On, EnBW and VEAG). On the level of
generation and thereby transmission this process is well underway. In distribution and retail,
however, there are still many firms. Even if mergers and looser forms of cooperation occur at
these levels, the resulting firms may still be largely independent of the four supra-regional
Verbundunternehmen (VUs).
Until recently, there used to be nine supra-regional VUs, which were heavily integrated
between generation and transmission. After the merger of the two smaller southern VUs into
EnBW in 1996, the main cases, which attracted much attention, were the mergers between
RWE and VEW forming RWE, and VEBA (i.e. PreussenElektra) and VIAG (i.e.
Bayernwerk) forming E.On, which reduced the number of VUs to six. These two mergers had
to be authorized by the cartel agencies. The former fell under the jurisdiction of the German
federal cartel office and the latter under the jurisdiction of the DG-Competition of the
European Commission. In close cooperation, both mergers were provisionally authorized.
One provision, as mentioned above, was that the T-component was omitted from the VV II.
Another provision was that the merging parties had to sell the shares they held in VEAG,
which in sum was over 75% of the VEAG shares. VEAG was created as a new firm directly
after the German reunification with the former East in 1990. It controls most of the generation
and transmission capacity in the former East. The Western VUs have been heavily involved in
providing the necessary capital and know-how to modernize the system in the East. In 1995,
VEAG was privatized and the shares divided among the western VUs. The three largest firms
at that time (RWE, VEBA and VIAG) each held 25% share and a holding of the other VUs
9(thus including VEW) received the remaining 25%. The process is now more or less
completed. Rather than floating the shares on the stock exchange, the shares have been sold to
a consortium of Sweden's Vattenfall and the US-firm Mirant (formerly Southern Energy).
Another substantial part of the shares of VEAG belongs to HEW, but over 70% of the latter's
shares in turn are held by Vattenfall. Finally, Vattenfall and Mirant are also majority owners
of the Berlin-based BEWAG. It thus appears appropriate to consider the group of VEAG,
HEW and BEWAG as only one firm which may, for the time being, be called VEAG+. The
fourth VU is EnBW, which is largely independent of the rest. EnBW is relatively small, but
has powerful back-up, since EDF from France was able to purchase over 25% of the shares.
Table 1 provides the respective market shares in generation, pre- and post mergers.
TWh Pre-merger (%) Post-merger (%)
VEBA 89.93 18.77
VIAG } E.ON 47.74 9.97 } 28.74
RWE 138.63 28.94
VEW } RWE 39.89 8.33 } 37.27
EnBW 41.21 8.60 8.60
HEW 12.31 2.57
BEWAG
VEAG
} VEAG+ 10.21
49.50
2.13
10.33
} 15.03
Other 49.60 10.36 10.36
Total 479.0 100.00 100.00
Table 1: Market shares in production.
Source: Based upon Europäische Kommission, 2000, p. 23 and own calculation.
Table 2 recalculates these values into generation concentration ratios (both using TWh). The
latter are for reasons of illustration compared to the values from the UK.
HHI CR1 CR2 CR3 CR4
Germany; pre-mergers ~1560 0.289 0.477 0.581 0.680
Germany; post-mergers ~2525 0.373 0.660 0.810 0.896
UK (1990/91) ~3225 0.455 0.739 0.913 0.983
UK (1998/99) ~1620 0.210 0.420 0.597 0.768
Table 2: Concentration ratios in generation output.
Source: Calculations based on Brunekreeft & Keller (2000).
Note: Pre- and post-merger refers to the RWE-VEW and VEBA-VIAG mergers and the sale of VEAG.
Clearly, the German post-merger concentration ratios are high and are now roughly
comparable with the concentration ratios in the UK directly after liberalization in 1990. Most
noticeable is the direction of change. The UK had significant problems with a concentrated
generation market and the authorities have attempted to decrease the concentration; in
Germany concentration increases. In the UK the generators were vertically separated from the
monopolistic networks and were consequently forced to attempt to make their profit in the
wholesale power market. Since they were quite successful, the wholesale prices were rather
10high (cf. e.g. Newbery, 1995). The institutional frame in Germany is different. The generators
are to a large extent vertically integrated with the monopolistic networks and are the network-
access charges are unregulated. It can be argued that the integrated firms' strategy is to set low
margins in the competitive markets (generation and retail), and make excess profits on the
networks (cf. Brunekreeft, 2001a) and thus, given the current institutional frame of
unregulated network-access charges, the relatively high generation concentration ratio does
not imply relatively high wholesale prices. Indeed, the wholesale prices (on the power
exchanges) are low; possibly as low as (short-run) marginal costs. This claim depends
critically on the fact that the network-access charges are unregulated. If the network-access
charges are constrained in some way or other, it is likely that the high concentration ratio may
turn out to be problematic. As has been the case in so many other countries, it appears that a
balance between different policy aims has been struck. Retaining "sufficient" competition on
the one hand and allowing the creation of "global players" on the other hand.
It is not entirely clear to what extent these VUs are integrated into distribution and retail.
Directly or indirectly, they do own distribution networks with their host retail departments,
partly in their own respective control area, partly via participation in holdings somewhere else
in the country. Moreover, with the exception of the original VEAG, they have all set up their
retail department aiming for domestic end-users nationwide. Especially, EnBW with its retail
subsidiary Yello is quite active in this segment. Apart from the VUs, some 700 mainly
communal firms determine the distribution and retail stage, largely vertically integrated. Still,
these communal firms are dominant host-retailers in their distribution network area, because
domestic switching rates are very low. The number of communal firms rapidly declines. The
scale of many of these firms is too small to sustain in the competitive market and in the
monopolistic distribution-network business it has become fashionable to exploit synergy
effects. A more rational business attitude drives the firms towards scale enhancement, merger,
privatization and outsourcing.
The generation mix in Germany is given in table 3. It shows that the total of somewhat over
450 TWh (with little below 100 GW installed capacity) mainly relies on nuclear power and
coal (hard coal and lignite). Dependence on oil, gas and hydro is low; other fuels are mainly
CHP and increasingly wind energy. The main, although still minor change since 1993, is that
the use of gas increased at the expense of lignite.
111993 1999
Hydro 4.49 4.61
Nuclear 34.34 34.81
Lignite 29.52 26.02
Coal 26.31 25.26
Oil 0.84 0.32
Gas 3.94 7.43
Other 0.57 1.54
Table 3: Generation mix (based on production).
Source: VDEW (1998) & VDEW (2000).
Note: Figures in %..
In Summer 2000, the government decided to phase out nuclear power over a period of 32
years; in effect, this means that existing nuclear capacity runs until depreciated, and that no
new nuclear capacity may be built (except that which was already under construction). In the
face of excess capacity, this was not planned anyhow. The phasing out of nuclear capacity is
largely the political will of the Green Party, which is the minority party in the current
government. Given the European Commission's renewed interest in nuclear power, it might be
questioned whether the "phasing out" of nuclear power is in fact not just a moratorium.
Consistent with the European Commission's policy the German government sets on a larger
share of renewables. The renewables are promoted with the so-called renewable-energies act,
which basically arranges a take-off-obligation for the network operator to which the
renewables capacity is connected, and a fixed feed-in price against which the renewable
power should be compensated.15 The costs are passed through, via the retailers, to the end-
users as a levy on the power price. There are compensation arrangements to spread the burden
evenly over the country.
The generation mix shows the large share of coal, which in sum makes up for approximately
half the electricity generation. Coal is the country's only primary energy source. It has thus
been policy to promote the use of inland coal (partly in order to decrease reliance on outside
primary energy and partly, in order to save the jobs of miners), which resulted in coal
subsidies. In a way, these are still in force, but are phased out. A problem of special interest is
the use of lignite. As mentioned above, lignite was and still is the main fuel in the former
East. For various reasons, it had been thought to be a good idea to continue the policy of using
lignite for electricity production after the reunification. The problem, however, was that the
existing capacity was completely outdated, both to economic and environmental standards. It
was agreed, although quite controversially, that the Western VUs would take over the
responsibility of modernizing the Eastern ESI (in the so-called Stromvertrag), which required
huge investments in among other things lignite capacity.
15
It varies for different energy sources, but for e.g. wind power it is approximately 17 Pf/kWh.
128000
generation
7000 capacity
6000 (million DM)
5000
4000 total
3000 total old
total new
2000
1000
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Figure 1a: Annual investment generation capacity in the German ESI.
Source: Based upon Karl (1996).
Note: "Old" means the old states (former west) and "new" means the new states (former east).
The modernization of the ESI in the former East is interesting; it is in fact the main difference
between the developments in the German ESI and other European states. Figures 1a and 1b
show that investment, especially in generation, has been exceptionally high. In 1995,
investment in generation capacity in the former East was higher in absolute terms than in the
West, whereas electricity consumption in the East is less than 15% of national consumption.
Over a period of less than five years about 20 billion DM has been invested in the ESI in the
former East alone, mainly financed by the Western ESI. The impression emerges that this
may contribute to an explanation to the question as to why the German ESI is not regulated, in
contrast to all other European member states.
9000
transmission +
8000
distribution
7000 (million DM)
6000
5000 total
4000 total old
3000 total new
2000
1000
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Figure 1b: Annual investment in transmission and distribution in the German ESI.
Source: Based upon Karl (1996).
Note: "Old" means the old states (former west) and "new" means the new states (former east).
134. Developments
4.1. End-user prices
The developments since liberalization have been quite spectacular. As expected, switching of
large industrial users and communal distributors has set in immediately after liberalization.
This quite often did not result in actual switching, but the threat to switch sufficed to
renegotiate the contract resulting in significantly lower prices.16 Hence, industrial prices
(including industrial network-access charges) fell significantly. Fully unexpected was the
development of retail competition aimed at the large group of small, domestic end-users. It
may be recalled that Germany opted for 100% eligibility directly with liberalization. Around
September 1999, the improved second version of the association agreement (VV II) was
presented, which eased network access considerably. More or less simultaneously the larger
VUs launched their retail-subsidiaries attacking the domestic-users market (dominated by the
incumbent communal host-retailers) with nationwide offers, supported by large-scale
marketing campaigns. The communal retailers responded swiftly by lowering their prices. The
price development for an average domestic end-users (3500 kWh annually; eurostat's category
Dc) is plotted in figure 2. Prices exclude VAT, but include the electricity tax. The latter was
introduced in April 1999 with 2.0 Pf/kWh, raised January 2000 to 2.5 Pf/kWh and again
raised January 2001 to 3.0 Pf/kWh.
The price developments have been divided into the incumbents' and the entrants' prices; to
recall, the incumbents are communal host retailers, whereas the entrants are the new retail
subsidiaries of the VUs and really new retail entrants. Both prices are calculated averages.
The incumbents' prices is a regional average, because these do not have nationwide offers.
The entrants' price is an unweighted average of the ten cheapest offers, representing a best-
practice benchmark.
The picture is telling. It indicates that the first round of the electricity tax has been passed
through completely, which is the peak in August 1999. Around this time, the retail
competition has set in, reducing the price level(s) significantly. The second round of the
electricity tax may have slowed down the price fall, but could not be passed through. The
lowest price level was reached around Spring 2000; by then the best-practice benchmark was
over 20% lower than the original price level less than one year before. Figure 2 also indicates
that the incumbents reacted immediately and simply followed further price decreases at a
distance. The distance reflects consumer "stickiness". Various market surveys reveal that
consumers have been aware of the possibility and are principally willing to switch, but
16
Not switching had the considerable advantage of avoiding the network-access difficulties of the first version of
the association agreement.
14required a premium to be convinced. The (averaged) distance between incumbents' and
entrants' prices peaked at about 15%. As can be seen, the price level is rising again since late
2000. This has at least two reasons. First, January 2001 again witnessed an increase of the
electricity tax by another 0.5 Pf/kWh, which is passed through. In the same line, a levy for
stranded CHP is being passed through. Second, especially independent new retailers encouter
financial problems. The profit margin which remains after subtracting the network-access
charges apparently is too low to be profitable (see further below), while the actual switching
rate has been modest as well. According to the ESI's association VDEW, the switching rate by
the end of 2000 was about 2% for domestic and 3.5% for commercial. Quite possibly the
latter is the result of the swift reaction of the incumbents. The new retailers respond to the
financial difficulties by either increasing their price level or leaving the market. By
mechanism, both reactions increase the average entrants' price level.
28
Aug.99
27
Incumbents
Oct.99
Aug. 01
26
Apr.00
Jan.00
25 Aug.00 Aug. 01
Pf/kWh
24
April 1999: electricity-tax: 2 Pf/kWh
Since January 2000: 2.5 Pf/kWh Jan.01
23 Average of
Since January 2001: 3 Pf/kWh Nov.99 nationwide
retailers
22 Jan. 00
Aug.00
Apr.00
21
Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01
Figure 2: Price development for an average domestic end-user.
Source: Based upon Brunekreeft & Keller (2000).
The developments deep into 2000 have been considered a success story. There has been a lot
of attention in the media and the successes in telecommunications seemed to continue with
electric power. As a by-effect, the arguments in favour of an ex-ante sector-specific regulator
15appeared somewhat academic.17 The recent developments (e.g. low switching, rising prices
and financial problems of entrants) might by the same token change regulatory attitude. As
mentioned in the introduction, in April 2001 the cartel office assessed the overall situation as
problematic and indicated to pursue a pro-competitive policy focussing on the network-access
charges (Bundeskartellamt, 2001). The high level of the latter, relative to the end-user prices,
is indeed the problem.
4.2. Network-access charges
Table 4 gives an overview of published network-access charges, averaged for a sample of
network operators.18 The overview has been restricted to end-users connected to the low-
voltage networks. The users are qualified according to the Eurostat-method (cf. e.g. Eurostat,
2000a and 2000b), where "D" stands for domestic and "I" stands for industrial, which includes
commercial. The second letter indicates the customer's size.
Pf/kWh
Ann. Cons. (kWh) Load End-user price Access charge Ratio
Level Total at night (kW)
Da LV 600 3 39.48 13.06 0.391
Db LV 1200 4 31.51 12.32 0.484
Dc LV 3500 1300 7 25.71 11.83 0.576
Dd LV 7500 2500 8 23.65 11.69 0.636
De LV 20000 15000 9 14.57 11.62 1.130
Ann. Cons. Max. load Ann. Util. (hrs)
(103 kWh) (kW)
Ia LV 30 30 1000 27.89 11.60 0.427
Ib LV 50 50 1000 27.26 11.59 0.437
Table 4: Network-access charges.
Source: Brunekreeft & Keller (2000).
Note: End-user price incl. taxes; Ratios are calculated for end-user prices excl. taxes.
The end-user prices include two taxes. First, a concession fee, for which ceiling values are
laid down in a federal decree. The level of the concession fee depends in particular on the
city's size. Here an average has been estimated of 2.7 Pf/kWh for domestic and 0.22 Pf/kWh
for industrial/commercial users. Second, the electricity tax, which now is 3.0 Pf/kWh for
domestic and 0.6 Pf/kWh for commercial/industrial users. The last column in table 4 gives the
ratio of the network-access charge in the end-user price, for which the latter has been cleaned
of taxes. The reader may notice immediately that the overall level of access charges is high -
both in absolute terms and in terms of ratio. It should be realized, moreover, that the domestic
categories Dc and Dd are by far the most important empirically. The overview shows that the
degree of differentiation, in contrast to the end-user prices is low. Because the end-user prices
17
The interested reader may be referred to Brunekreeft (2001b) for a more extensive and more formal analysis of
this argument.
18
Although they must be published, many distribution-network operators still fail to do so.
16differ with customer size, whereas the network-access charges differ only modestly, the ratio
varies significantly. Note in particular the category De, for which the ratio is above one; in
other words, the network-access charges are higher than the end-user prices (cleaned of
taxes). These users rely, by Eurostat's assumption, heavily on off-peak power for heating
purposes. As mentioned above, the end-user prices in Germany do have a peak-load element,
whereas the network-access charges do not.
Ib Netherlands
Germany
Ia
UK
Dd
Dc
Db
Da
0,000 0,100 0,200 0,300 0,400 0,500 0,600 0,700
Figure 3: Ratio of network access charges to end-user prices.
Source: Based upon Brunekreeft (2001a).
Figure 3 plots the ratio of network-access charges in the (cleaned) end-user prices and makes
a comparison with the UK and the Netherlands. Both the latter apply price-cap regulation for
the network charges; in the UK for about ten years now, while in the Netherlands regulation
has started since the beginning of 2001. For the Netherlands, a tough price cap with an
average X of 5.9% annually, has not yet been taken into account in these figures. Two aspects
are strikingly clear. First, the relation between customer size and the ratio are reversed
between Germany on the one hand and the UK and the Netherlands on the other hand. The
reason is that the structure of the German access charge is not sufficiently differentiated.
Second, for the empirically relevant groups Dc, Dd; Ia and Ib the network-access charges in
Germany are high (both in absolute and relative terms). The latter is the problem for new
entrants and is now also the focus of the cartel office. For an end-user it is not important how
exactly the final price is composed; for a competitor it does matter, because the difference
between the end-user price and the network-access charges (subtracting taxes) determines the
remaining profit margin. The latter is relatively small in Germany.
174.3. Third-party discrimination
The first three years of liberalization have been characterized by many complaints about
discriminatory behaviour (for court, cartel authorities and in the media). As argued above, the
real problem for competitors is the low profit margin, which is induced by the high network-
access charges, which in turn are a result of the integrated network operators' incentives.
Discriminatory behaviour is -given the institutional frame- not the real problem. Even so,
where it occurs, it should be prohibited. The network-access review of the task force of the
cartel offices (Bundeskartellamt, 2001) explores discriminatory behaviour with a list of eight
issues, which play a role in practice; some are not considered to pose a real problem, while
others are problems which can be cleared for court. This section will provide a brief
discussion of discriminatory behaviour.
Refusal to provide TPA
TPA should be granted on non-discriminatory terms, be it by the TPA provision in the energy
act or by the essential-facilities doctrine in the competition act. However, there are legal
exceptions and subtle ways to block TPA. With respect to the latter, firms are reported to
make negotiations unreasonably difficult or cumbersome, demanding unnecessary formalities.
Making a serious offer can be unduely delayed, possibly at the expense of the competitor. A
related issue is that TPA is refused because the legal status of the (long-term) contract of the
switching end-user is not cleared. Cases have been settled for court, where the incumbent may
have an argument, but which nevertheless hinder the development of competition. Apart from
real cases, the incumbent may simply hide behind a legal argument and wait until the
competitor goes to court.
Exceptions on providing TPA are legally given by capacity constraints and by the lignite
clause. In one case, Berlin-based BEWAG justified refusal of TPA to its competitors (among
which RWE) with the argument of constrained capacity. The case, which was to be cleared by
the federal cartel office,19 was rather exceptional and complex, because it concerned the
interconnector between the former East and West Berlin taken into operation in 1994. The
cartel office made unambiguously clear that all capacity has to be allocated on equal terms to
all those wanting access and that priority rules must be applied with utmost restriction. In
cases without capacity constraints there is no obvious problem; this is important because the
cartel office explicitly pointed out that if a consumer switches, required line capacity may
simply go from one hand to another without requiring additional capacity. The incumbent
cannot claim the line capacity "left behind" by the switching consumer, if the consumer needs
19
Cf. Bundeskartellamt, B8-40100-T-99/99; 30th August 1999.
18it to be supplied by the third party. For an economist this seems rather obvious; for a lawyer,
however, this means that property rights are reduced in status. For the case where the
interconnector might be congested (peak times), the cartel office ruled that existing capacity
should allocated proportionally according to shares in demand. The line capacity was
estimated at 400 MW in peak times, whereas the peak load in West Berlin was 1966 MW, and
thus each supplier could be allocated 20.3% of the (peak) load of its customers.
The lignite clause concerns the former East. As explained above, for socio-political reasons,
the production of lignite was thought to require protection against undue competition,
resulting in the lignite clause, which states that if an authority assesses refusal of TPA it
should carefully take account of the effects on lignite production. In other words, this clause
gives VEAG an argument to refuse TPA and it is up to the courts to decide whether refusal is
reasonable. What exactly is reasonable in this case is quite controversial, although the courts
tend to be pro-competitive.
Switching costs
Switching costs may be defined here as anything which requires a premium to convince a
consumer to switch away from the incumbent. The incumbents have applied a variety of
instruments to set or increase switching costs, some of which are unambiguously abusive,
while others possibly involve a trade off. An example of the former is refusal of contract's
notice on formal grounds; these may have a legal basis, but may also be unreasonable.
Another example is plain intimidation of switching customers. At several occasions,
incumbents have been reported to suggest that continuity of power supply could no longer be
guaranteed after switching, because of e.g. technical reasons or solvency problems of the new
supplier. Obviously, the average domestic end-user will not be informed in detail about the
technical and legal arrangements concerning continuity of supply. Yet another example is if
incumbents match the competitive offer as soon as the consumer announces the switch. This
is what potential competition is supposed to do, but in a developing market, it is the
incumbent's strategy of informed selection which makes the competitors' lives very hard.
Two related issues are more challenging. First, explicit switching costs based especially on
additional meter reading involved in the switch. Usually, meter reading is only once a year
(normally bundling entire streets). If an end-user switches supplier during the year, it has to be
settled how much the end-user consumed up to this point. This implies an additional meter
reading at the moment of switching, which is relatively expensive.20 These are real costs and
20
It may be noted, that actual reading may be circumvented, by e.g. applying estimates derived from the load
profiles.
19the incumbents have made a practice of it to pass through these costs to the switching
customer (or to its new supplier). For average domestic end-users these costs can be about
half the expected savings. The cartel office (Bundeskartellamt, 2001, pp. 49 ff.) goes in pains
to argue that such costs can be allocated legally consistent (i.e. cost based) to all end-users
(through network-access charges), rather than to the switching customer. The main argument
is that such switching costs impede the development of competition, whereas also the non-
switching customers would gain from competition by a lower price level overall and thus it
can be legally justified that the non-switching customers contribute to these costs.
The second issue concerns use-of-system contracts. An end-user demands two separate
services: power supply and use-of-system (i.e. network access). This requires two contracts,
which can, however, be bundled into one contract. Whereas the new suppliers insist on
representing the customer in all issues and insist on offering an all-inclusive contract, the
incumbents insist on signing a separate use-of-system contract with the end-user and refuse to
accept all-inclusive contracts. The formal underlying argument is the legal question of
liability in case of insolvency. The problem is that it applies asymmetrically for switching
consumers, which raises perceived switching costs and may thus keep customers from
switching. Courts and cartel offices argue in favour of the competitors and are strongly
opposed to the incumbents' refusal of accepting all-inclusive contracts.
Load profiles
To overcome the problems of expensive time-of-use meters, which if required, would stifle
retail competition, statistical load profiles (as in Scandinavia and the UK) have been
developed and are applied. Two different methods are used: synthetical and analytical load
profiles. The network operator decides which method is used in its area. The cartel office
review (Bundeskartellamt, 2001, p. 62) reports that 59% used the synthetical method, 14% the
analytical method, while 27% of the questioned network operators did not respond. The
synthetical method ex ante estimates a load profile for a (group of switching) consumer(s).
Possible imbalances between scheduled and real values (although this cannot be known
because these consumers are not time-of-use metered) pass on to the network operator. This
method is relatively inaccurate, but given its ex-ante nature, is relatively friendly for
competitors. The problem is that the anticipated costs for imbalances are passed through ex
ante into the network-access charges; it will be difficult to control whether the pass-through
relates to the actual costs or is excessively high.21 The analytical method is more accurate
(and more expensive to install). It meters the time-of-use load in the network and subtracts the
21
Since the network-access charges are unregulated anyhow, this argument does not seem to be overwhelmingly
relevant.
20load of all time-of-use metered consumers; the residual per definition is the load of the non-
metered consumers. By means of synthetical estimates this residual can be further allocated to
various user groups. This method thus is ex post, which leaves the competitors with
considerable uncertainty. More importantly, the data on network load and aggregated load of
all metered users are only known to the network operator. Within reasonable ranges, this
provides a large potential to discriminate against third parties.22
Another issue with load profiles is less challenging, but real. Previously it has been customary
to install time-of-use meters for consumers with an annual consumption of over 70,000 kWh.
The ESI has agreed that in case of switching load profiles are to be used for consumers with
annual consumption up to 30,000 kWh. This leaves a market segment of consumers between
30,000 and 70,000 kWh for which a time-of-use meter has to be installed in case of switching.
Apparently, in many cases this is commercially not attractive, which sets competitors at a
disadvantage.
Imbalances
A last issue which deserves attention concerns compensation payments for imbalances, which
are differences between scheduled and metered values.23 Nera (2000) brings a criticism of a
specific point in the institutional arrangements in the German ESI. Ideally, the price to be paid
for imbalances is something like a market price, reflecting the system's marginal costs of
electrical power (which can be opportunity costs) at any moment. It would not make a
difference whether the imbalance is over-extraction or over-feed-in; it would be charged
against or compensated with the same price. In contrast, the association agreement II arranges
a fixed predetermined price for imbalances. If there would be only one fixed price, valid for
both extraction and feed-in, and if this prices is something like an average of fluctuating
market prices, this would provide an opportunity to use the imbalance payments for strategic
manipulation. If the market price is higher than the imbalance price, a third party would over-
extract and sell in the spot market and reverse. Such strategic manipulation would endanger
system's operation. Therefore, the association agreement II sets two prices: a feed-in price (2
Pf/kWh) and an extraction price (6 Pf/kWh). Since normally the former is lower and the latter
is higher than system's marginal costs (~ 4 Pf/kWh), this avoids strategic manipulation. The
problem is that third parties lose money either way and are put at a competitive disadvantage
relative to the integrated network operator. It may stressed that this is not genuine
discriminatory behaviour; it only works out that way in lack of an institutional alternative.
22
Currently, this is a hypothetical argument. There are no indications of actual abuse of this potential. Given the
current unregulated institutional frame this does not surprise, but it does indicate a substantial opportunity to
discriminate should regulation of the network-access charges actualize in the future.
23
It is beyond the scope of this paper to be extensive. The interested reader may be referred to nera (2000).
21Consequently, the cartel office argues in favour of installing markets for imbalances to tackle
the problem. Meanwhile, RWE has started an imbalance market in the internet.24
Looking through the list above, one cannot escape the feeling that all in all the extent of
genuine discriminatory behaviour is modest. Apart from unsystematic consumer intimidation
and paper-wars (which should be pursued with tough means), various issues fall back on real
arguments and/or involve trade-offs, which should be or have been settled for court.
Moreover, there are strikingly few indications that the real potential to discriminate through
imbalance settlement and load profiling is systematically abused.
5. Concluding remarks
This paper provides an impression of the developments in the electricity supply industry in
Germany since liberalization in April 1998. The developments in Germany deserve close
attention, because Germany is the only EU member state which opted for negotiated third
party access, whereas the European Commission recently proposed that all member states
install a sector-specific regulator with authority to set or approve network-access charges ex
ante. Negotiated TPA means in the German practice that there is no sector-specific regulator.
The issues concerning network access (including the level of the charges) is left to the cartel
office, authorized mainly by the essential-facilities doctrine in the competition act. The
essential-facilities doctrine states that access to the networks should be non-discriminatory
and against a fair and reasonable charge. The latter aspect is becoming increasingly important,
since the cartel office published a review on network access, which emphasizes excessive
access charges. A small, but important remark in the same review notes that the cartel office's
authority is restricted to ex-post action; in other words, something like a price cap for the
network-access charges in the German ESI requires a modification of existing legislation.
Another practical implication of negotiated TPA is that the industry associations worked out a
general framework for network-access conditions, the so-called association agreement (abbr.
with "VV"). After a complete failure with the first version, since December 1999 the second
version is in force (VV II). Apart from a set of more technical conditions and information
requirements, the VV II sets the frame for the structure of the network-access charges. In
contrast, the level of the network-access charges is left to each individual network operator;
there are six (although it will be four soon) transmission network operators (largely integrated
with generation), and some 700 distribution network operators (integrated with retail).
Basically, the VV II conforms to European standards; it can no doubt be improved on several
24
Cf. www.rwenet.com.
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