Feb 17 - International Herald Tribune

 

As European governments scrambled to assess energy security following Russia's standoff with Ukraine over natural gas prices, one quiet but startling development went unnoticed in the eastern half of the European Union. That is where Germany, Russia's largest energy customer, has been amassing a vast energy empire, spun out through a web of holdings across Hungary, the Czech Republic, Slovakia and further south to Bulgaria and Romania. Regulatory authorities are beginning to step up their scrutiny of the region's energy market, now in the grip of Germany's two largest energy companies, E.ON Ruhrgas and RWE. Their conservative investment policies, regulators say, have led to the establishment of new monopolies at the expense of diversification and, in some cases, of competition.

Concerns about monopolistic conditions in the European energy market were underscored on Thursday in Brussels by Neelie Kroes, the European Union's competition commissioner, who warned that gas and electricity suppliers across the 25 EU member countries faced a new antitrust crackdown in order to liberalize the market further. (Page 17)

The EU started opening its energy markets to competition six years ago, but many countries are still dominated by former state monopolies that continue to choke off prospects for new entrants while keeping prices high. In Eastern Europe, the acquisitions by E.ON Ruhrgas and RWE Germany's largest energy concerns have not been without controversy. Both companies say they made a strategic decision to enter these new markets nearly ten years ago.

But advocates of renewable energy say both companies have done little to diversify the region's energy sources.

And both have been challenged at one time by either the European Union's competition commission or the Czech Energy Regulatory Office for alleged abuse of their dominant positions in the market.

When E.ON Ruhrgas last year bid for Hungary's MOL oil and gas company, the potential alliance seemed like a perfect match: The German firm would marry MOL's wholesale gas and storage network with E.ON Ruhgas's retail gas and electricity activities.

But the European Commission blocked the acquisition, claiming that E.ON Ruhrgas would be in a position after the transaction to use its control over gas resources in Hungary to increase its ability to determine prices.

The German company would also be able to influence other trading conditions in the supply of electricity and gas to industrial, commercial and residential customers and in the generation and wholesale supply of electricity, the commission said.

After several months of negotiations, E.ON Ruhrgas in January agreed that it would release over one million cubic meters of gas each year on the market for eight years in addition to other measures designed to create competition in the market. E.ON Ruhrgas ended up paying 450 million, or $534 million, and assuming debt of 600 million for the Hungarian company. Following the compromise with the European Commission, E.ON Ruhrgas will hold 86 percent of the gas consumption market.

Even with that, the European Bank for Reconstruction and Development said energy sector privatizations in Hungary and other countries have not automatically led to greater competition.

"If anything, there is far less competition that there should be," says Zbigniew Kominek, the bank's energy economist.

RWE's involvement in the Czech market seems to confirm that view. The company is now wrestling with the Czech energy regulatory office, which challenged RWE's 4.2 billion takeover of Transgas, the nation's 3,640-kilometer-long, or 2,257-mile-long, gas network.

As soon as the Czech market was opened to outside competition a year ago, industrial customers started complaining that RWE had increased prices by as much as 40 percent.

Jitka Cipova, an official at the Czech energy regulatory office, said the gas market "was not functioning properly" because it resembled a monopoly. "RWE-Transgas is the only gas supplier in the Czech Republic," she said. "Our office had decided to cap prices for all customers." The agency is currently investigating 34 contracts between RWE-Transgas and large Czech companies, which negotiated deliveries from Transgas.

Both E.ON Ruhrgas and RWE pride themselves on having staked out territory in Eastern and Central Europe early.

Today, E.ON Ruhrgas has a 22 percent share of the Czech electricity distribution market and a 40 percent share of the electricity market. Its market share in Hungary has jumped to more than 85 percent with the MOL acquisition, and it is expanding in the electricity distribution market in Bulgaria and Romania. RWE has established a strong presence in the Czech Republic and Hungary in addition to having investments in Poland and Slovakia. After it bought Transgas, it gained a monopoly over the supply and transportation of gas both from Russia and Norway, and it has a sizable share of the electricity market in Slovakia and of the electricity and gas markets in Hungary.

"We are not there for a cashout," said Sebastian Ackermann, a spokesman for RWE. "We are in the region for the long term."

Both companies widened their net in the region in order to obtain stakes in a sector that was slowly being prepared for liberalization. They also saw the big potential for growth compared to Germany, where the sector this year is to come under increasing pressure after the cartel office, in a bid to make the market more competitive, ruled that households were no longer obliged to buy their energy from just one supplier.

"The markets in Eastern Europe will be completely open over the next few years and they are growing," said Christian Drepper, spokesman for E.ON Ruhrgas's activities in the region. "We wanted to get in there before there was complete liberalization." The companies entered the region as former Communist governments sought to introduce energy market reforms, a difficult task for a sector that had been dependent on cheap Russian gas.

Significant investments were needed to address everything from deteriorating energy grids to environmental issues, all of which were neglected during the communist period.

In that respect, said Peter Kaderjak, a lecturer in regional energy policy at the Corvinus University in Budapest, the German companies were welcome because they provided crucial investments to modernize the infrastructure. The other advantage, he said, is that the German companies have in some cases blocked attempts by Gazprom, Russia's state-owned energy monopoly, to further strengthen its grip over the transmission and retailing of energy. "In Hungary, we are still dependent on Gazprom for our gas," Kaderjak said. "But at least the electricity sector is being transformed and integrated into the EU network."

But there is also a downside to that strengthening of the infrastructure.

Peter Ahmels, president of the German Wind Energy Association said that the big German energy companies that have entered the markets in Eastern Europe have been very conservative in their approach.

"Essentially, they have exported the traditional German structures instead of using the chance to diversify into the renewable energy industry."