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The relevant wholesale electricity market: an antitrust point of view

Clara Poletti25 September 2007

IEFE - UNIVERSITÀ COMMERCIALELUIGI BOCCONI

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Outline

Why does the definition of the relevant market matter?

How to define the relevant geographic market

The Italian case:

Actual methodology

Possible drawbacks

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Way does it matter?

The way in which the relevant market is defined crucially determines the outcome of any antitrust investigation: horizontal and vertical mergers, abuse of dominant position, sector inquiries

The role of market definition is to “identify in a systematic way the competitive constraints that the undertakings involved face”. (EC Notice on the definition of the relevant market for the purposes of Community competition law, OJ C 372 on 9/12/1997, Section I)

Once the relevant market is defined, market shares and other indices to assess dominance or for other competitive assessments are calculated with reference to that market.

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Competitive markets?

The way in which the relevant market is defined crucially determines the outcome of any antitrust investigation: horizontal and vertical mergers, abuse of dominant position, sector inquiries

The role of market definition is to “identify in a systematic way the competitive constraints that the undertakings involved face”. (EC Notice on the definition of the relevant market for the purposes of Community competition law, OJ C 372 on 9/12/1997, Section I)

Once the relevant market is defined, market shares and other indices to assess dominance or for other competitive assessments are calculated with reference to that market.

Source: DG TREN

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Market shares of installed capacity

3,2%

0,5%

0,7%

0,9%

1,1%

1,9%

2,1%

3,3%

3,7%

7,1%

9,8%

9,8%

56,0%

0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0%

Altri operatori

ACEAELECTRABEL TRADING SPA

SIET S.P.A.

A.S.M. BRESCIA S.P.A.

IDROENERGIA SCRL

TIRRENO POWER S.P.A.

AEM TRADING S.R.L.

EDISON TRADING S.P.A.

ENIPOWER S.P.A.

ENDESA ITALIA SPA

EDIPOWER S.p.A.

GRTN

ENEL PRODUZIONE e ENEL GREENPOWER

In 2004 Enel owned around 56% of the total “efficient” capacity installed in Italy

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Italian wholesale market: geographic zones

NORD

MFTV

PRGP

ROSN

CNOR

CSUD

SUD

CALB

SARD BRNN

FOGN

SICI

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Relevant market: what is it? (1)

A relevant market is described by: a product or group of products and a geographic area

Three main sources of competitive constraints: demand substitutability, supply substitutability, and potential competition.

Note that the dimension of the relevant market can be different depending on the issue at stake:

the analysis is essentially prospective - for example: concentrations or cooperative joint ventures

The analysis refers to past behaviour - for example: abuse of dominant position

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Relevant market: what is it? (2)

Demand-side substitution:

takes place when consumers switch from one product to another in response to a change in the relative prices of the products.

Supply-side substitution:

Sometimes consumers may be unable to react to a price increase, nevertheless, producers may be able to do so by for example, increasing their supply to satisfy the demand of these consumers.

Potential competition:

is the competitive threat from potential new entrants. Entry must be possible in a short period of time

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Geographic market (1)

We focus on the definition of the geographic market

Defining the relevant geographic market in the wholesale electricity sector is not straightforward because:

Demand side substitution is not the main competitive constraint because of non storability

Supply side substitution is most important….but different, because of congestions and cost structure.

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Geographic market (2)

The question to answer is:

assuming that buyers would respond to a price increase on the identified region only by shifting to products produced outside the region, what would happen?

If an attempt to raise the price would result in a reduction in sales large enough to make that price increase not profitable, than the tentatively identified geographic area would prove to be too narrow.

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Geographic market (3)

Standard tool: “Small but Significant and Non-transitory Increase in Price” (“SSNIP”) test, promulgated in the U Department of Justice 1982 Merger Guidelines, and adopted by the European Commission in 1997

Assuming a hypothetical monopolist in the region we have to test if for a prince increas of 5% or 10%:

000 p

qcpq

p

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AGCM and AEEG methodology

A sufficient (but not necessary) condition for the SSNIP test to be satisfied is that event taking into account max imports from other markets the hypothetical local monopolist is necessary to supply demand

In fact:

pz,hDRz,h 0

If residual demand is positive there exists a profitable increase in prices

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AGCM and AEEG methodology

For each zone they calculated the following value:

Where:

DRz,his “residual demand” of a hypothetical monopolist for

zone “z” in hour “h” Dz,h is total domand of electricity in zone “z” in hour “h”

Impmax,h is the maximum amount of potential flows of energy

arriving in zone “z” in hour “h” coming from neighbouring zones

hhzhz pDDR max,,, Im

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AGCM and AEEG results (1) (period 1st April – 30th September 2004)

% of hour with DRz,h > 0

Value of the ratio

North Centre-North

Centre-South

South Calabria Sicily Sardinia

Working days 100% 24% 0% 2% 0% 95% 100%

Week-ends 100% 2% 0% 0% 0% 94% 100%

North Centre-North

Centre-South

South Calabria Sicily Sardinia

Working days 76% -23% -48% -31% -69% 49% 100%

Week-ends 58% -66% -85% -45% -81% 43% 100%

hDz

hDRz

,

,

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AGCM and AEEG results (2) (period 1st April – 30th September 2004)

The North and Sardinia are distinct geographical relevant markets because for each zone DR > 0 in more than 95% of the hours of the sample and DR is a relevant part of total zonal domand (> 60%)

proceeded to re-aggregate the other zones (Centre-North, Centre South and South) into a single Macro-South zone and Sicily and Calabria into another Sicily zone and

% of hour with DRz,h > 0 North Macro South Sicily Sardinia Working days 100,0% 99,8% 100,0% 100,0%

Week-ends 100,0% 100,0% 100,0% 100,0%

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AGCM and AEEG results (3) (period 1st April – 30th September 2004)

Enel turned out to be “absolutely indispensable”: a) for 100% of the hours on the Macro-South market; b) for 44% of the hours on the North market; c) for 29% of the hours on the Sardinia market; d) for 24% of the hours on the Sicily market

Endesa turned out to be “absolutely indispensable” for 67% of the hours on the Sardinia market;

Edipower turned out to be absolutely indispensable for 19% of the hours on the Sicily market;

No other Enel competitor showed the power to fix the wholesale market price of electricity on the North and Macro-south markets

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AGCM and AEEG results (4) (ENEL absolute indispensability 1st April – 30th September)

North 04 North 05 South 04 South 05 Sicily 04 Sicily 05 Sardinia 04 Sardinia 05

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AGCM and AEEG results (5) (EDIPOWER absolute indispensability 1st April – 30th September)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

North 04 North 05 South 04 South 05 Sicily 04 Sicily 05 Sardinia 04 Sardinia 05

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Absolute indispensability 2006

Percentuale di ore in cui l'operatore è assolutamente insipensabile al soddisfacimento della domanda di energia

Macrozona EDF ENEL ENDESA Nord 12,9% 41,2% 5,7% Sardegna 0,0% 13,1% 48,4% Sicilia 14,0% 69,7% 0,0% Sud 0,7% 90,4% 0,3%

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Possible drawbacks

Interdependence with the relevant product market;

Competitive capacity vs max imports;

Definition of demand;

Results depend on the starting point;

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Possible drawbacks: product market (1)

It is not possible to define geographic markets without first having a working definition of the relevant product markets

If the relevant product market is not well defined the geographic market could be too large or too small

Namely in electricity market there is a growing agreement that offpeak and peak times of demand could be seen as separate markets

“The absence of substitutability constraints means that in certain circumstances the appropriate definition of the market may be limited to a shorter duration than has generally been used for analysis in many other industries…..” (OFGEM)

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Possible drawbacks: product market (2)

Non storability: it is not, in general, possible for a consumer to purchase a unit in a low-priced, off peak period for use in a higher-priced, peak period

Cost structure: peaking power plants might not be seen to act as a

competitor for a base load station with low marginal costs;

Start up costs should be taken into account

The relevant geographic market could be smaller for the peak product and bigger for the off peak product

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Possible drawbacks: competitive capacity

The residual demand tests has an implicit assumption: all the capacity installed in the neighboring zones in on the left of the supply function

This way the competitve constraint coming from neighboring markets is overstated

Example: zone A has only carbon plants, zone B has only gas fired plant. As long as the price in zone A is below the cost of gas, producers in zone B do not represent a competitive constraint for the hypothetical monopolist

The relevant geographic market should be defined by using a model that takes into account network constraint, cost structure and demand

As a result the relevant geographic markets could be smaller