The European Commission has published a preliminary report in its energy sector inquiry which it launched last summer. The probe confirms that the European Union still faces serious competition problems in the energy sector, with the target of a fully open and competitive gas and electricity market by 2007 looking difficult to achieve.

There are five main issues identified by the preliminary report:

1. Market concentration

Both the gas and the electricity markets remain highly concentrated. Market entry to wholesale gas markets is limited by the fact that incumbents control the gas imports and long-term reservations in import pipelines. In the electricity market high concentration in generation means that incumbent operators are able to raise electricity prices.

2. Vertical foreclosure

The gas market is characterised by vertical integration and long-term contracts which are foreclosing the market. Vertical integration between generation and retail on the electricity market contribute to prevent new entries.

3. Market Integration

Gas and electricity markets are still highly segmented along national lines and cross-border competition is minimal. This is reinforced by restrictive clauses in gas import contracts and limited access to cross-border pipelines. Interconnectors are crucial for the integration of the electricity market and incentives to increase capacity need to be strengthened.

4. Transparency

There is a lack of information for new entrants in both markets hindering them from competing effectively and playing into the hands of the incumbent companies.

5. Price formation

Gas prices in most upstream contracts are linked to oil derivatives with no connection to market-based pricing while the co-existence of regulated and free markets is causing mistrust among electricity customers.

Various measures are available to the watchdog when the outcome of a sector inquiry identifies competition law problems on a market. In the instant case the Commission has revealed that its primary course of action will be to open antitrust investigations under the competition law prohibitions found in Articles 81 and 82 of the EC Treaty, meaning that in this next stage, individual undertakings will become the focus of Commission enforcement action.

It could be expected that certain major former state monopolies might become the focal point of some unwanted attention from the European regulator.

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