This post concerns a bit of a Dutch thing, namely the ‘position’ of the Dutch National Competition Authority ACM on an agreement by electricity producers active on the Dutch market, but it is interesting more generally for those who are interested in the relation between (EU) competition law and other issues like sustainability. The trigger for this position by the ACM is a plan in the national Energieakkoord which is an agreement between organisations representing employers, employees, environmental NGO’s, companies and other social actors that aims to benefit the transition to a more sustainable energy policy and sustainable economic development in the Netherlands. Part of this Akkoord is the deal between four electricity producers to close down five older coal fired power plants (all constructed in the 1980s) in a coordinated manner. This get-together of four competitors to reduce production capacity has obvious competition law implications, so the Netherlands Competition Authority (ACM) was consulted on the compatibility of this plan with Article 101 TFEU and the Netherlands equivalent, Article 6 of the Competition Act. As the title suggests, the ACM considered the plan incompatible with competition law in a very preliminary and barely reasoned finding.
Interestingly, the ACM has just consulted the public on its position paper concerning competition law and sustainability and this case may well be the first real test case for the position contained in that paper. Firstly, though, some background to this matter. The relation between sustainability or public interest objectives and competition law has been controversial for quite some time. This is reflected in the various Commission guidelines on state aid for environmental matters (now in their sixth edition since 1974) and the numerous cases that have dealt with competition law and public interests. It has also been the focus of some excellent legal research (most recently by Chris Townley and Suzanne Kingston) and heated debates on the fundamental question whether there should be a role for such considerations in (EU) competition law in the first place. This question, however, has been answered in the affirmative, with Commission decisions like the one in CECED and Court judgments like those in Wouters, OTOC and Sydhavnens. The question today is how public interests should play a role in competition law and the cartel ban (Article 101 TFEU and the equivalent Article 6 of the Netherlands competition act) in particular.
In this regard it is interesting to see that the ACM has published a position paper on this matter in the first place, whereas the Commission seems keen on erasing its CECED precedent and the special attention for environmental agreements from the books. It may be recalled that the CECED agreement between the European importers and manufacturers of washing machines no longer to market energy inefficient washing machines was exempted under Article 101(3) in part on the basis of the environmental benefits that follow from the increased energy efficiency. Whereas the CECED decision was used as an example of an environmental agreement that passes competition scrutiny in the 2001 Guidelines on Horizontal Agreements (OJ 2001 C 3/2) in a special chapter devoted to environmental agreements, this category of agreement no longer has a special chapter devoted to it in the 2011 Guidelines on the application of Article 101 TFEU to horizontal agreements, whereas the CECED case is presented as an example of the standardisation agreement (OJ 2011 C 11/1, para. 329. Within the ECN, therefore, the guidance by the Commission is limited and with the position paper and this case the ACM appears to want to play the leading role.
Let’s have a look at the findings then. The essential summary according to the ACM, set out in the press release, is that the benefits are not outweighed by the costs to consumers. Energy prices will rise, according to the ACM, whereas the benefits are too limited to compensate the disadvantages arising from the higher prices, according to the president of the executive board of the ACM. This means that the ACM is seriously barking up the consumer welfare tree, looking only at narrowly defined costs and benefits, in a way that I least don’t remember from the Commission.
These findings are set out in slightly more detail in the analysis that is also available online from the ACM website.
Here we first find the description of the Energieakkoord and the way it was concluded. This involves over forty organisations from different industry sectors and representing different interests, including the consumer interest. The ACM then moves on to check the compatibility with the first paragraph of Article 101 TFEU. Its findings start with the observation that this closure plan involves approximately 10% of the generation capacity installed in the Netherlands. Moreover, coal fired generation capacity is situated towards the bottom end of the merit order curve. This means that the marginal costs of a unit of production of this type of plant is relatively low (in fact only hydro and nuclear have lower marginal costs), so this type of production capacity will first be used to meet demand for electricity. Only if demand exceeds the generation lower merit order capacity will higher order, more expensive, capacity such as gas fired plants be used. Phasing out this coal fired capacity will thus mean that higher order capacity will need to be used at an earlier stage, involving higher costs and thus leading to higher electricity prices. According to the ACM these are ‘clues that the upward pressure on prices that can be expected can be of real significance’ [translation by author]. Now this seems a bit speculative to me, but this is of course only a preliminary assessment.
Moreover, this assessment starts from the premise that removing 10% of the installed capacity in the Netherlands will have this effect. On a wider European market, the effects may be negligible. Indeed, what is to keep a Dutch supply company from simply buying coal fired electricity from, say, a German coal fired plant (like the one in Bund Naturschutz, C-115/09) and then import into the Netherlands to sell it to meet demand in the Netherlands? Poor interconnection leading to limited cross-border transmission capacity may be what is keeping this from turning into a reality. According to the ACM, there is more interconnection, ‘but this is not complete’ [translation by author]. In the 2009 decision on the takeover of Dutch utility Essent by German utility RWE, the Commission distinguished between peak and off peak hours, with markets being national at peak hours whereas there is a north west European market at off peak times (para. 30 et seq.) We find none of this deeper insight in this preliminary assessment. On a similar note other arguments put forward by the energy companies are set aside in a way that is gnomic as well as succinct. The result is that we don’t even know whether this is seen as a hard core restraint, for which no market analysis is required, or rather given a – albeit short – effects-based analysis. This matters, because for restrictions in the object, or hard core, category, no such effects analysis is required, greatly reducing the possibilities for redeeming such restrictions.
The ACM then moves on to the third paragraph. Here, the environmental effects are weighed in. As a general statement, the ACM considers that a ‘more sustainable production can be welfare enhancing’ [translation by author]. So, what are the environmental benefits? In a nutshell, closing down coal fired power plants means less emissions of CO2, SO2, NOx and fine particulate matter.
As far as CO2 emissions reductions are concerned, the ACM observes the so-called waterbed effect. This refers to the situation where the EU emissions trading scheme (ETS) for greenhouse gasses functions like a waterbed. The extra emissions reduction in the Netherlands reduce demand for greenhouse gas allowances on the European market, thus lowering the price and allowing for an increase of emissions elsewhere in the EU. In the opinion of the ACM, this means that the associated advantages will spread over the entire ETS-area (the entire EU) resulting in only a very small share for Dutch electricity users. The result is that the benefits in terms of CO2 emission reduction are considered irrelevant. The other emissions, however, are taken into account as they generate effects in the Netherlands. Because of the National Emissions Ceilings Directive (NEC Directive), NOx and SO2 emissions reductions in the Netherlands allow the Netherlands to emit more from other sources or to take less other measures to reduce emissions. This translates into avoided costs amounting to € 9,40 / kilo NOx and € 5,40 / kilo SO2.
For fine particulate matter there is no such ceiling, but the emissions of this have an effect on the health of citizens in the Netherlands. This is estimated to factor in at € 44,30 / kilo. To my mind this is where we enter the realm of the purely speculative. There is, to the best of my knowledge, no safe limit for fine particulate matter exposure and estimates are that in the Netherlands alone every year between 2300 and 3500 people die prematurely as a result of short term exposure to fine particulate matter. Mortality as a result to long term exposure is expected to be much higher, as the Netherlands Planbureau voor de Leefomgeving (Environmental Planning Agency) has stated in a report. I personally fail to see how any price tag can be attached to what is essentially the increased chance of dying prematurely, but the plot thickens. In the same report the Planbureau finds that the Netherlands is a net exporter of such fine particulate matter. This is a nice way of saying that fine particulate matter produced in the Netherlands is likely to cause premature death in Germany and Denmark (because of the southwesterly winds), and these cost effects are not taken into account. So much for a waterbed effect… All in all, the benefits to Dutch electricity consumers are calculated to be in the order of € 180 million over the duration of the agreement.
The costs as a result of the capacity reduction, however, are equally significant and weigh in at € 450 million over the duration of the agreement. The conclusion is that, in the view of the ACM, there is no advantage and a fair share for consumers, meaning that the last two conditions of Article 101(3) need no further scrutiny. The ACM’s preliminary finding is therefore that the coal closure plan qualifies as a prohibited restriction of competition. In this regard it is interesting to see that VEMW, an ardent proponent of the interests of large energy consumers, is one of the parties to the Energieakkoord. Apparently, they considered these costs acceptable.
What, then, is the fate of sustainable competition law? For one thing, focusing on costs and benefits for a limited number of consumers alone certainly sees at odds with the essence of sustainability. Climate change and environmental deterioration more generally affect many people beyond the inhabitants of this little kingdom by the sea. Dogmatic competition law would also look radically different if the focus were on consumer cost effects alone. For one, the analysis of recoupment as a requirement for predatory pricing would need to be reconsidered on this side of the Atlantic.
Finally, sustainable competition law requires legal certainty. The utilities involved in the coal closure plan have sought to achieve this by asking the ACM for its opinion. What they got is really little more than a vaguely worded preliminary assessment that is open to significant criticism. In this criticism we read that the Akkoord still stands and will not be terminated because of the ACM’s position. What could happen is that the plan is put into effect, the ACM finds a prohibited agreement and issues a decision that would then be challenged, leading ultimately to a preliminary ruling. This would create the much needed legal certainty, unless the ACM follows the Commission’s example and decides to opt for a commitment or settlement procedure that would allow it to stick to its preliminary assessment without conducting a fully blown competition law and economics analysis. Then again, this blog entry is only a preliminary assessment, so don’t take my word for it.