EU Support to strengthening competition in Serbia

1. EU Support to strengthening competition in Serbia Hungarian Practice: Competition law and energy markets • Arpad Hargita • EU-SCS Implementing consortium lead by A project financed by EU

2. Introduction I. Short story of liberalization II. GVH activity in the energy sector: a) consumer deception cases b) abuse of dominance cases c) sectoral investigation and competition advocacy III. Regulation/Competition - Cooperation with the regulator

3. I.Liberalisation of energy markets in Hungary • Liberalization of the Hungarian Energy market • from 01/01/2003 : opening for large customers (over 6.5 GW), public lighting, certain local governments → 33 % of the consumption • from 01/06/2004: all non-household customers → 65 % of the consumption • from 01/07/2007: for all customers • until 2008 twin model public utility market – open market → customers could choose where they buy from - not a good solution as public utility market owned 95 % of the purchase agreements – no real room for competition • from 2008 open market: universal market (for households and small customers) and open market for others

4. I.Liberalisation of energy markets in Hungary – one key problem Long terms contracts: • between1995-1998 privatisationof generatingcompanies→inordertomakeitwork and tofacilitatethereturnsontheconsiderableinvestments • lastinguntil 2012-2021 – representing80 % of electricitydemandin Hungary →closing market: sellingonlytotheformerincumbent, hinderingnewentrants, and hinderingcompetitionbecause of the fix prices (some of the generating companies had profit even with 10 % capacity usage) • EU Comissiondecision: agreementshas to be ended beforethe end of 2008 ( samesituationinPoland): unlawful state aid and restricting competition

5. I.Liberalisation of energy markets – pasttrends EU policy: • liberalization in the first sectors (air-transport and telecommunication) was bringing good results • the main goalsin energy werealways: (i) security – (ii) sustainability – (iii) competitiveprice • 2007 Sector investigation showed serious problems: • still national markets, • high concentration, • insufficient unbundling of production and distribution → consquence: series of cases started ended up with commitment decisions, e.g.: a) E-On (2008) divesting appr. 20 % of its generation capacity, b) RWE (2009) divesting its gas transmission system, c) ENI (2010) selling its shares in certain transport capacities

6. I.Liberalisation of energy markets – recenttrends 2014 Commissionreport- January: falling of wholesalepricesbetween 2008-2012 between 35-45 % • Commissioncommunication - October: completion of internal market gives 16-40 billion EUR benefits/year, furtherinterconnection of theenergy market needed, and alsothelevel of renewableenergysources has to be increasedfrom 23,5 % to 27 % until 2030 EU position on Hungary - NRA should have the power to set network tariffs → more independence needed: now Ministry sets key parameters and NRA calculates - because of energy prices were cut 20 % in 2013 and further cut is foreseen there is no private investment in the sector

7. II.GVH activity in the energy sector The role of the competition authority is to protect competition – in case of the Hungarian energy sector: • help the process of liberalization by hindering abuse of incumbents (see cases also in railway/telecom), • consumer protection in order that consumers are able to chose the offer that is the most advantageous for them, • cooperationwiththe regulator, • competition advocacy.

8. II. Hungarian cases – Abuse cases DÉMÁSZ/ TITÁSZ cases (2002) • concluding with certain municipalities long-term contracts (10-15 years) on providing all the services related to street lighting with penalty provisions that impeded or at least limited the municipalities’ possibility to purchase as eligible customer electricity for street-lighting from other distributors after the liberalisation → infringement decisions EMFESZ case (2008) - tender published by a huge fertilizer manufacturer (PNM) for supply agreement of natural gas – agreement concluded with winner (EMFESZ) - after one year parties could not agree on the modifications of the price formula → manufacturer claiming that the supplier is in dominant position and abusing it - Competition Council stated that the contract itself does not create dominance, the market situation in the moment of signing the agreement has to be taken into account → no dominance at that moment (EMFESZ had 5 % market share) - stopping of gas supply may be a breach of contract but not abuse of dominance

9. II. Hungarian cases – Abuse cases DÉMÁSZ/ TITÁSZ/ E-On/ ELMU/ DÉDÁSZ/ ÉMÁSZ cases (2006) • as a result of the sector investigation, procedures started against all the six previous local monopoly energy suppliers for long-term contracts (1-6.5 years) containing “English clause” (possibility of last offer) for large customers • Theory of harm: foreclosing the liberalized market using monopoly position with contracts concluded before liberalization on the retail market • Conclusion: no infringement as, • the share of the customers tied (15-20 %) and the share in the overall share of these contracts (1-2 %) was too low, • english clause was not applied, • customers did not feel that they were hindered in switching • other players appeared on the market

10. II. Hungarian cases – Consumer deception cases Hungarian Telekom (subsidiary of Deutsche Telekom) – former incumbent of fixed telephony entered the gas retail market for households → a) 09/2011-08/2012 campaignpromising5 and 8 % lower gas prices – compared to universal gas price - for customers of MT (in part of this period a 12 month loyalty contract was an additional option) b) 09/2012 the price of gas changed – 3 and 5 % reduction instead of 5 and 8% c) One key sentence of the campaign was „ the possible yearly saving is 16400 HUF” d) Calculators created on the webpage of MT showing yearly savings

11. II. Hungarian cases – Consumer deception cases

12. II. Hungarian cases – Consumer deception cases

13. II. Hungarian cases – Consumer deception cases Competition Council stated that - the advertisements constituted an unfair commercialpractice/misleading advertisement as an average customerbelievedthatthepricereductionwouldlastfor a longerperiodbasedonthe main messageemphasizingyearlysavings, - thecostsavingspresentedintheadvertismentwerenotachievedbecause of thepriceraising. 20 million HUF fineswereimposed

14. II. Hungarian cases – sectoral investigation and competition advocacy • GVHadviced Government already in 2000 that liberalization is essential and an independent regulatory agency is needed • 2006 - sectoral investigation on why the proposed level of competition was not reached → suggestions of the GVH: • renegotiation of the long term contracts as they restrict competition on the market foreclosing it from competitors, • creation of a regional market (done in 2012) and common exploitation of cross border capacities (e.g. joint auctions), • opening new competitive energy generation capacities, • raising consumers awareness.

15. III. Cooperation with the regulator – regulation vs. competition

16. III. Cooperation with the regulator – regulation and competition Cooperation is essential because of possible parallel application is possible and convergence (e.g. SMP/dominance, market definition) → Cooperation agreement between GVH and the sector regulator a) executive level: yearly meeting b) decision making level: nonstop cooperation → information sharing on cases (sending order opening the procedure and decision ending it) c) international cooperation: harmonizing positions towards international organizations (OECD) d) joint researches – joint awareness making campaings

17. Thank you for your attention! arpad.hargita@giz.de