Commission Decision

of 13 June 2000

on the compatibility of a concentration with the common market and with the EEA Agreement

(Case COMP/M.1673 - VEBA/VIAG)

(notified under document number C(2000) 1597)

(Only the German text is authentic)

(Text with EEA relevance)

(2001/519/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area, and in particular Article 57(2)(a) thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1), as last amended by Regulation (EC) No 1310/97(2), and in particular Article 8(2) thereof,

Having regard to the Commission decision of 4 February 2000 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission,

After consulting the Advisory Committee on Concentrations(3),

Whereas:

(1) On 14 December 1999 a merger proposal was notified to the Commission under Article 4 of Regulation (EEC) No 4064/89 to the effect that VEBA Aktiengesellschaft and VIAG Aktiengesellschaft intend to merge within the meaning of Article 3(1)(a) of the Merger Regulation.

(2) On 4 February 2000 the Commission decided, pursuant to Article 6(1)(c) of the Merger Regulation and Article 57 of the Agreement on the European Economic Area (EEA Agreement), to initiate proceedings in this case.

(3) The Advisory Committee discussed a draft of this Decision on 24 May 2000.

I. THE PARTIES AND THE PROPOSED TRANSACTION

(4) VEBA is a diversified group with businesses in electricity, natural gas, oil, chemicals, telecommunications, water, waste disposal, steel trading, logistics and property management. The group operates at all levels of the electricity industry through its subsidiary PreussenElektra AG (hereinafter: PreussenElektra). PreussenElektra is one of the largest German interlinked power companies; its traditional supply area comprises the northern Länder of Schleswig-Holstein and Lower Saxony and large parts of Hessen. With RWE and Bayernwerk AG, which is part of VIAG, it had, in addition, together with the other west German interconnected power companies, taken over Vereinigte Energiewerke AG (VEAG) following German unification. In any event, PreussenElektra controls VEAG jointly with RWE and Bayernwerk. Outside the interconnected supply area, the VEBA group has further controlling interests, inter alia, in regional supply companies in the new Länder (e.dis and Avacon).

(5) VIAG is an international conglomerate which operates in the electricity, natural gas, oil, chemicals, telecommunications, packaging, water, waste disposal, aluminium, steel trading and logistics sectors. Its energy activities are grouped together in the affiliate Bayernwerk AG (hereinafter: Bayernwerk), which is also one of the large German interconnected power companies. Bayernwerk too operates at all levels of the electricity industry. Its traditional network and supply territory covers most of the southern Land of Bavaria. As well as VEAG (see recital 4), Bayernwerk together with Southern Energy, an equity investment company belonging to the American Southern Company, jointly controls Berliner Kraft- und Licht (BEWAG) AG. The east German regional supplier TEAG, which supplies an area outside Bayernwerk's interconnected power territory, is also part of the VIAG group.

(6) The parties intend to merge VIAG, as the transferor entity, with VEBA, as the transferee entity, pursuant to Article 2(1)(1) of the Conversion Law (Umwandlungsgesetz). This is therefore a merger in the legal sense.

II. CONCENTRATION

(7) VEBA and VIAG are two hitherto independent undertakings which intend to merge. This is therefore a concentration within the meaning of Article 3(1)(a) of the Merger Regulation.

III. COMMUNITY DIMENSION

(8) The parties had a worldwide combined turnover of more than EUR 5 billion in 1998(4) (VEBA: EUR 42,8 billion; VIAG: EUR 25,1 billion). VEBA's Community-wide turnover (EUR 33,5 billion) and VIAG's (EUR 18,2 billion) are both more than EUR 250 million. In 1998 VEBA generated two thirds of its Community turnover in Germany. According to its own figures, VIAG did not generate more than two thirds of its Community turnover in any one Member State. The notified merger therefore has a Community dimension.

IV. APPRAISAL UNDER ARTICLE 2 OF THE MERGER REGULATION

(9) Both parties operate in many sectors. It must therefore be assumed that the merger would create a dominant position for VEBA/VIAG in the electricity sector in Germany (A) and strengthen dominant positions in the chemicals sector (B). In other sectors the creation or strengthening of a dominant position is unlikely. This holds true for the gas (C) and steel trading (D) sectors.

A. ELECTRICITY

(10) The merger proposal leads to the creation of a dominant duopoly for VEBA/VIAG and RWE on the German national market for the supply of electricity at the interconnected level.

1. Relevant product market

(11) In previous decisions(5), the Commission made a distinction between the following relevant product markets in the electricity industry: generation, i.e. the production of electricity in power stations; transmission, i.e. the transport of electricity over high voltage lines; distribution, i.e. the transport of electricity over medium and low voltage lines; and supply, i.e. the delivery of electricity to final consumers. In a further decision(6), a further product market, trade in electricity, was distinguished, although the market was not conclusively defined.

(12) The Commission's previous decisions assessed market relations mainly in the British and French electricity industries. In more recent decisions, which relate to concentrations on the German market, it has largely been possible to leave the definition of the market open. The structure of the electricity industry is important for the definition of the market, since it tells us what the supply side and the demand side consist of.

(13) The electricity sector in Germany is subdivided vertically into national interconnected companies, regional power supply companies (regional suppliers) and local distributor companies (in particular municipal electricity undertakings).

(14) The electricity generated by the interconnected power companies and that imported by power importers is delivered to different customer groups over the extra high voltage and high voltage networks (380/220 kV), i.e. the transmission system. As well as the regional supply companies, the transmission system supplies the larger municipal electricity undertakings, electricity traders and the larger industrial special customers, who draw their electricity direct from this voltage level.

(15) Moreover, the interconnected power companies, because of their vertical integration through affiliates, operate on all downstream markets (see recitals 16 et seq.).

(16) The regional supply companies deliver electricity via low voltage (under 20 kV) and sometimes medium voltage (20 to 110 kV) lines to municipal electricity undertakings and also to final customers. In so doing, they operate for the most part as distributors of the electricity generated by the interconnected power companies. They also generate electricity themselves on a small scale, but this they sell to their own customers via low voltage and medium voltage lines.

(17) At the lowest distribution level, municipal electricity undertakings supply only final consumers over low voltage lines. The municipal electricity undertakings, too, generate some electricity themselves, but they use it to cover their own needs. It is mainly power from combined heat and power stations. How far this market level should be further subdivided by type of final consumer was left unresolved in earlier Commission decisions(7). There is at any rate reason to suppose that market conditions for the supply of small customers(8) (household, commercial and agricultural customers with a connected load of less than 30 kW and an annual power consumption of less than 30 MWh) from low voltage networks are different from those for the supply of industrial special contract customers from medium voltage and higher network levels, and that these are therefore to be classified as different product markets.

(18) Electricity trading is a market in the process of formation. It was only made possible by customers being given a choice in the wake of liberalisation. Electricity trading is understood as the buying and selling of electricity at one's own risk and for one's own account. It takes place at all voltage levels. Thus, in addition to independent traders with no generating capacity or network of their own, electricity traders include, on the supply side and to some extent on the demand side as well, interconnected companies, other power station operators and electricity importers. Agency activities, i.e. the supplying of electricity by service stations and retail chains which do not bear the marketing risk (this being borne instead by the generator) are not trading activities.

(19) The power supplied at interconnected level (see recital 14) forms a separate market in view of the characteristics of the product (i.e. the voltage level) and of the specific customer groups interested in it. It comprises (in Germany) the generation of power at interconnected level and electricity imports, which are delivered over extra high voltage and high voltage lines to different customer groups, such as regional distributors, the larger municipal electricity undertakings, electricity traders and large industrial special customers. This market will be examined in what follows. Where the parties operate on downstream markets, the effects of the merger on those markets are taken into account in the competition assessment of the effects at interconnected level.

2. Relevant geographic market

(20) The relevant geographic market consists of an area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas.

(21) In the notification, the parties assume that the market for the supply of electricity at the interconnected level is a Community-wide market. They base their assessment, inter alia, on the fact that the Community's Electricity Directive created uniform ground rules for generation. In their view, the fact that customers in the European Union were increasingly changing to Community-wide tendering and that the UCPTE network(9) provides a link between the transmission systems of the large continental Member States was also evidence of a larger than national market.

2.1. The market is not supranational

(22) The Commission's investigations have shown, however, that the market for the supply of electricity at the interconnected level is not supranational. This is due chiefly to the fact that the capacity of the interconnectors, i.e. the network links with neighbouring countries, is limited and that therefore, simply for technical reasons, imports are low. Thus, according to the notification, the quantity of electricity imported in 1998 was 38,5 TWh, or approximately 8 % of German power supply. According to the calculations of the European Transmission Systems Operators (ETSO)(10), imports into Germany in the period 1 October 1998 to 30 September 1999 were about 28 TWh. With electricity consumption at 479,0 TWh, the proportion of imports would thus be just under 6 %. On the Commission's estimate, the actual proportion of imports is probably lower still, since some of the electricity imported into Germany is not made available to the German market. Rather, it is transit power, which simply crosses Germany and is delivered to other target countries. Thus, France's EdF, for instance, delivers electricity via the German interconnected network and Switzerland to Italy's ENEL. Consequently, in view of the high import barriers, the markets for the sale of electricity at interconnected level are at best national.

(23) Foreign generators are dependent on the interconnectors' available capacities for imports into the German market. According to market participants, however, these capacities are extremely limited. The following table shows the rated capacities of the individual interconnectors available for imports into Germany.

Table: Capacities for connection with other countries (Source: UCPTE, 1998)

>TABLE>

(24) The arithmetical addition of the individual transmission capacities of all the interconnectors between other countries and Germany gives a total of approximately 46,0 GW. According to the parties, this rated capacity does not yet include the network connections between Luxembourg and Germany.

(25) Even the parties do not assume, however, that this arithmetical transmission capacity reflects the physical reality and that the capacity of the interconnectors for electricity imports into Germany determined in this way is fully available. Rather, they assume that the downstream networks permit a maximum of about 15 GW in imports at any one time. The reason for the clearly lower effective import capacity, they say, is the loop flow associated with simultaneous transmissions to and from other places.

(26) Taking account of measured flows, a plan was worked out at international level which provides, inter alia, for calculations of available capacities between countries to be given(11). According to these calculations, which on the German side were carried out by RWE on behalf of the Association of German Interconnected Companies (Deutsche Verbundgesellschaft), the maximum import transmission capacity is 13,4 GW.

(27) Most of the market participants interviewed, however, regarded even this maximum figure as still too high. As a result of inevitable loop flows and voltage and stability problems, maximum import capacity, in the view of most market participants, is between 7 and 10 GW. The market participants interviewed pointed out, moreover, that interconnector capacity was reserved to a considerable extent, through long-term contracts, for the interconnected power companies, which own the interconnectors. Thus, in particular the interconnector on the German-Danish border, which on the German side is operated by PreussenElektra, is already 50 % blocked by long-term contracts. Of the capacity, which ording to the parties is 1200 MW, only 500 MW are awarded at auction.

(28) The parties contend that the interconnectors will be freed up by simultaneous imports and exports of electricity, so that capacity equivalent to the balance of imports and exports is again made available. The measurement of the power flow carried out by the UCPTE clearly shows, however, that the balance of the power flow to an interconnector clearly points in one direction, so that there is either a clear export surplus or a clear import surplus. Further electricity supplies of equivalent amount and travelling in the same direction as this balance are at all events ruled out as the interconnector's capacity is reserved up to this amount. Thus certain quantities are currently exported from France to Germany, but only limited quantities are imported from Germany into France, since the legal framework necessary for liberalisation has not yet been completed. In the Netherlands, the electricity price level is currently higher than in Germany, so there are deliveries from Germany to the Netherlands, but not the other way around. At other interconnectors too, exports or imports clearly predominate, so that there is currently hardly any freeing up.

(29) The possibility cannot be excluded that exports and hence the freeing up of the interconnectors in favour of electricity imports will increase in future, especially in view of the increasing liberalisation of the electricity markets in the countries bordering on Germany. Such an increase in exports depends, however, on many factors. For want of specific pointers to the future development of exports, it is premature, however, at this stage to take account of such an, as yet, uncertain development in the context of this merger proceeding.

(30) What is more, imports especially from foreign suppliers of electricity will be further impeded by the fact that for cross-border electricity supplies into the Federal Republic a transmission charge ("T-component") of 0,125 Pf/kWh becomes payable, provided that the quantity of power transmitted cannot be netted out (see point 2.4 for more details).

(31) Accordingly not only the low import ratio but also the limited import capacity of the interconnectors and the additional costs (including those associated with using the interconnectors) show that the geographic market is in no way supranational.

2.2. The competition assessment is predicated on a national market: the market will not be smaller than national in the foreseeable future

(32) Given that many energy supply companies are not yet delivering to customers in their competitors' previously protected supply areas, even though they are entitled to do so, it is questionable whether at the interconnected level there is already a national market. Prior to the liberalisation of the electricity markets the activity of every energy supply company was limited to its own supply area. Accordingly, the geographic market for the supply of electricity at the interconnected level was not bigger than the group of customers that could be reached via the generating company's transmission network.

(33) In more recent decisions(12), which examined the effects of a merger on already liberalised electricity markets, the Commission found signs that the generation of electricity in Germany could constitute a national market but left the precise definition open. The Commission takes the view that the market for the supply of electricity at the interconnected level in Germany will develop into a national market in the near future. The decisive factor here is that ground rules have in the mean time been adopted for the through-transmission of electricity over third-party networks, to which must be added other factors affecting the market (see points 2.3 and 2.4).

2.3. Ground rules for through-transmission

(34) The German Law updating the legislation on power supply (Gesetz zur Neuregelung des Energierechts)(13) has led to the liberalisation and deregulation of electricity markets. The Law transposes Directive 96/92/EC concerning common rules for the internal market in electricity (hereinafter called the Electricity Market Directive) into national law. In Germany there is no restriction of customers to a particular size, as is allowed under Article 19 of the Electricity Market Directive. Rather, the Law opens up competition to all customer groups, including final consumers of any size. The German Law originally excluded territorial agreements ("demarcations") and exclusive rights of way in "licensing agreements" with municipalities from the prohibition on agreements in restraint of competition (Articles 103, 103a of the old Law on Restrictions of Competition (GWB)). This rule was abolished by the Energy Industry Law as amended (EnWG), with effect from 29 April 1998.

(35) Delivery to third parties within the previously closed supply territories is made possible in two ways - either by additional lines and cables or by through-transmission.

(36) To ensure non-discriminatory through-transmission, the Electricity Market Directive provides for the grid to be operated as a separate entity and for separate accounts to be kept in respect of grid operation(14). The possibilities are to transfer ownership of the grid to an owned operating company, to operate the grid through an independent company, or to separate grid operation and generation and sales only at the organisational and accounting levels. The German legislator has opted for the last variant.

(37) The general right to through-transmission, laid down in Article 6 of the EnWG, is based on the idea of negotiated access to the grid. Under Article 6(1) EnWG, operators of power supply networks must make the supply network available to other undertakings on conditions which are not less favourable than those actually or implicitly applied by them in comparable cases for services within their undertaking or vis-à-vis affiliated or associated undertakings. Under the Law updating the legislation on power supply, it is possible to refuse through-transmission in individual cases, except (a) where there are insufficient powers to protect electricity generated from lignite (lignite protection clause in Article 4(3)) or electricity from combined heat and power stations (Article 6(3)) and (b) pursuant to the reciprocity clause (Article 4(2)).

(38) Article 6(2) EnWG provides that the Federal Ministry of Economic Affairs can, by regulation with the approval of the Bundesrat (the upper house of the German Parliament), regulate the form of contracts under Article 6(1) EnWG and can lay down criteria for determining the remuneration for through-transmission. The Federal Ministry of Economic Affairs, however, has not used this power, since rather than use State control it has preferred a voluntary solution by the trade associations concerned. In Associations Agreement I of May 1998, the Federal Association of German Industry (BDI), the Industrial Energy Association (VIK) and the Association of German Power Stations (VDEW) created the basis for freely negotiable agreements between undertakings in the electricity industry and their customers. Associations Agreement I expired in August 1999. Since January 2000, Associations Agreement II, which runs for a period of two years, has been in force.

(39) In the Commission's view(15), individual provisions of Associations Agreement II make it more difficult for market participants such as independent electricity traders to operate nationally compared with large energy supply undertakings. Under the Agreement two trading zones are being set up in Germany. The north zone comprises the transmission networks of VEAG, PreussenElektra, VEW, HEW and BEWAG, while the south zone covers the territories of EnBW, RWE and Bayernwerk. If power is delivered from one trading zone to the other or over the border to or from another country, a transmission charge ("T-component") of 0,125 Pf/kWh (0,25 Pf/kWh for crossing the interzonal boundary) becomes payable, provided that the quantity of power transmitted cannot be netted out. "Netting out" means setting off the quantity which crosses the border in one direction against a quantity which crosses it in the other direction. The relevant balance is determined for each "energy balance group" ("Bilanzkreis"), with several undertakings delivering and drawing electricity via the group.

(40) In addition, the accounting procedures for balancing energy make it more difficult for market participants to operate nationally. This includes the electricity which in the event of fluctuations in a customer's offtake is made available by an interconnected power company (see recital 122).

(41) The imperfections of Associations Agreement II, however, do not alter the prognosis that in the near future the market will be national. In particular, it is not accurate to talk of separate geographic markets, whether in the form of the old supply areas or of the two trading zones. However, the said features of Associations Agreement II will have to be taken into account in the competition assessment.

2.4. Other factors

(42) The investigations in this case have shown that the through-transmission of electricity still takes place on a limited scale only. In particular, given that the provisions on through-transmission in Associations Agreement II are currently applied by only a small proportion of energy supply companies, market participants still have reservations about the handling of through-transmission requests. Through-transmission requests are, however, still necessary where Associations Agreement II has not yet been implemented. Consequently, electricity is still supplied at present to customers outside the former interconnected areas largely through "provision". According to the Commission's investigations, customers outside the former interconnected areas with a requirement of approximately 90 GWh are supplied by provision, while only customers with a requirement of approximately 60 GWh are eligible for through-transmission. Typically, provision involves the new supplier having a direct relation with the customer, with whom he therefore concludes a power-supply contract, although he buys the necessary electricity "on the spot" from his own local supplier under a separate deal. Several market participants pointed out that the market was going through a shake-up and that provision would be used instead of through-transmission for a transitional period only. As soon as Associations Agreement II takes effect throughout the country, it will, in the opinion of many market participants, be possible to sell generated electricity anywhere in Germany on a through-transmission basis.

(43) Even if today, on account of the slow implementation of Associations Agreement II (and the delayed processing of through-transmission requests to the extent that, instead of Associations Agreement II, Associations Agreement I is applied), national competition still means that energy suppliers largely limit their activities to their own supply areas, the initial basic requirements for a national market are satisfied. Accordingly, for the purposes of examining the present merger, the Commission assumes a national market, at least at interconnected level. How far there can be, or continue to be, genuine competition on this market, given the ground rules that first have to be present and the structural change resulting from this merger, is a matter for the competition part of this examination.

(44) The restrictions of through-transmission resulting from the preferential transmission of lignite-based electricity, laid down in Article 4(3) of the Law updating the legislation on power supply, or from the establishment of the north and south trading zones under Associations Agreement II (see below) do not lead to the geographical division of the German market for the supply of electricity at the interconnected level along the boundaries thus created. Admittedly, VEAG's lignite protection clause does provide a legal basis for frustrating through-transmission in the new Länder, but its application has been challenged in numerous lawsuits currently before the courts. There are also reasons for supposing that the clause is hard to apply successfully in practice.

(45) Furthermore, the establishment of the Frankfurt and Leipzig exchanges, on which electricity will be physically traded nationwide, points to the creation of a national market. Because of the delay in adopting Associations Agreement II, which is seen as an essential requirement for the national supply of electricity, the exchanges are not yet up and running. Trading on both will begin this autumn at the latest. For a transitional period, there will be serious obstacles as a result of certain provisions in Associations Agreement II (see the competition assessment for more details), but these will become less important as time goes by.

(46) In what follows, therefore, it is assumed that the market for the supply of electricity at the interconnected level covers the entire territory of the Federal Republic of Germany.

3. Competition assessment

(47) It can be assumed that the merger would result in VEBA/VIAG and RWE holding a dominant position on the German national market for the supply of electricity at the interconnected level.

3.1. Present market structure

3.1.1. The German market for electricity supply at interconnected level is already highly concentrated and the potential for competition is restricted by other factors

(48) By far the largest proportion of electricity in Germany is generated by the eight interconnected firms. These include those energy suppliers which have at their disposal both their own electricity generation capacities and their own extra high and high voltage networks, i.e. transmission networks. The following interconnected companies operate in Germany: RWE, VEBA (PreussenElektra), VIAG (Bayernwerk), VEW, EnBW, BEWAG, HEW and VEAG. They are grouped into the Deutsche Verbundgesellschaft. The networks of interconnected power companies are connected to one another and to the extra high voltage networks of bordering countries. Interconnection agreements govern the supply of other interconnected firms with electricity. Protection against the possible failure of a power station, and with it the failure of the electricity supply, is ensured across borders and throughout Europe by way of agreements with interconnected companies in neighbouring countries. In addition, electricity importers operate on the market, selling electricity directly from the interconnected system to their customers.

(49) The following table gives an overview of the market shares of the interconnected firms on the market for electricity supply at interconnected level.

Table: Market shares for electricity supply at interconnected level (electricity generation at interconnected level) - pre-merger situation

>TABLE>

(50) The above table calculates market shares at interconnected level on the basis of the electricity generated by the interconnected companies in 1998. It is true that electricity generation in itself constitutes not a market, but an industrial activity. The electricity generated by interconnected firms is supplied to the next market level and to a lesser extent to other interconnected firms. Customers at the generation level are essentially electricity redistributors, large industrial firms as special customers, and recently also electricity traders. The volumes of power generated by the interconnected companies and passed on to these customers thus at the same time also serve as a basis for the calculation of the market shares of competitors at interconnected level. While this method of calculation does not take account of electricity imports, these, as explained above, make up only a marginal proportion of power supplied in Germany. Moreover, most imported electricity is supplied to the interconnected firms, which then sell it on to their customers over the grid. It can be assumed that the imported electricity corresponds in volume terms to the size of the interconnected firm in each case. This was not called into question during the course of the proceeding either by the parties themselves or by third parties. The market shares given above would thus remain much the same even if electricity imports were taken into account.

(51) The table shows RWE as the leading interconnected firm with a 33,1 % share of electricity supply from the grid, currently well ahead of VEBA with its 21,2 % share. Other interconnected companies, including VIAG, generate considerably less electrical energy and none of them have market shares of more than 13 %.

(52) Correspondingly, RWE and VEBA also have a clear lead on the other interconnected firms operating on the market when it comes to structural data on installed power station capacity (see table: "Generation capacity in Germany"). With 19,8 GW of installed generation capability, RWE has only a slightly larger stock of power stations than VEBA (17,5 GW), but twice as much capacity as the next largest generator VIAG. Most other interconnected companies have installed power generation capacity that does not exceed 10 GW.

Table: Generation capacity in Germany, minus industry and national railway

>TABLE>

(53) In order to clarify structures on the electricity market as a whole, the parties included in their notification data on power supply to final consumers. These data give power supply in 1998 as 479,0 TWh (230 TWh to special customers, 249 TWh to ordinary electricity consumers). The parties attributed this supply to the interconnection companies operating in Germany on the basis of the origin of the power supplied, without considering which firm at which market level, for example regional supply company or municipal electricity undertaking, maintained direct contractual relations with customers. The data provided by the parties, based on VDEW statistics, do not therefore represent market shares in the strict sense, but clarify the importance of individual energy supply companies at all market levels taken together and portray the structures of the German electricity sector. The data give the following picture of power supply to final consumers:

Table: Power supply on the German market as a whole - pre-merger situation

>TABLE>

(54) With the volumes of power calculated in this way, RWE leads with a share of more than 30 % of the volume supplied. By comparison, only VEBA (21,4 %) and VIAG (12,4 %) have shares that clearly exceed 10 %. Of the other interconnected companies, only EnBW has a share of as much as 9,3 % of the power supplied. The strong position of RWE, VEBA and Bayernwerk (VIAG) on the market for power supply, one which is even stronger than their positions in electricity generation, is also due to their good access to final consumers in the new Länder, where these companies operate through regional suppliers which at present mainly distribute the electricity generated by VEAG. What is more, electricity imports, though accounting for only a marginal proportion of the electricity sold in Germany, predominantly benefit the interconnected companies.

(55) Moreover, account must be taken of the shareholding structure of VEAG and BEWAG, listed as independent suppliers in the table. BEWAG is controlled jointly by Southern Company and VIAG. VEAG is controlled jointly by VEBA, VIAG and RWE(16). Accordingly, in calculating the market position of the parties, account must be taken of the fact that neither VEAG nor BEWAG is in competition with the interconnected companies jointly controlling them.

(56) The situation with regard to VEAG is significant in yet another respect, namely that of competition between VEBA, VIAG and RWE. The latter cannot be expected to enter into competition with VEAG, as they might otherwise render their joint investment in that company worthless. In practice this means that, as far as VEAG's traditional supply area in eastern Germany is concerned, no competition is likewise to be expected from VEBA, VIAG and RWE as between one another.

(57) If all power generation in Germany including that generated by industry is taken into consideration, it can be seen that the eight interconnected companies generate about 71 % of electricity in Germany. However, it should also be taken into account that the electricity generated by industry is essentially used by the firms concerned and thus is not widely available to the free market. If firms were to sell the electricity they generate, this would require the establishment of a sales and customer services structure, which would not be economical for most industrial firms, given the small amounts that could be sold. Since the electricity generated by industrial firms is essentially consumed by these firms themselves, it cannot be classed as being available to the free market. The figures for electricity generated by energy suppliers also have to be qualified. The 700 or so regional and local energy suppliers account for some 10 % of electricity generated in Germany. This enables them to cover a proportion of their own requirements and reduce their dependency on the interconnected firms. However, in view of the investment required for the establishment of a sales outfit and of the limited amounts that could be sold, they can be considered as market participants only to a limited extent.

(58) Lastly, it should be noted that, although the market seems to admit competition, as can be seen from events after the beginning of liberalisation, a number of factors limit the potential for competition. These factors are examined more closely in the assessment of the merger. Attention will be drawn here especially to the following factors: the homogeneity of electricity as a product and the transparency of the (highly concentrated) market (see point 3.2.2.1); the strong position of the interconnected firms in the old demarcation zones and the opportunities for basing competitive behaviour on the original market allocation (see point 3.2.2.4); the expected small growth in demand and the low price elasticity of demand (see points 3.2.2.5 and 3.2.2.6); the barriers to entry to the market (see point 3.2.3.4); and the interconnected firms' holdings in undertakings at the downstream market stage and the terms of Associations Agreement II (see points 3.2.3.5 and 3.2.3.6).

3.1.2. The extra high voltage transmission network, which is likewise of importance to competition at interconnected level, is over 80 % controlled by the four largest power generators

(59) As few as eight companies together own 93 % of the transmission network in Germany. RWE together with VEBA and VIAG owns 52 % of the extra high voltage network, or 81 % if VEAG, controlled by these three companies, is included. They thus essentially control the resources which, in the electricity market, are necessary to competition based on transmission over the networks of third parties. Moreover, on the basis of their existing networks, VEBA and VIAG already cover an uninterrupted area from Scandinavia to the Alps as well as all the new Länder via their controlling shares in the east German company VEAG. Since they also own the interconnectors linking each extra high voltage network to the extra high voltage networks of neighbouring countries, they control most of the infrastructure on which their competitors are dependent if they are to enter the market successfully. The importance of ownership of the network, especially in the light of Associations Agreement II, is examined in greater depth below (see point 3.2.3.3).

Table: Transmission network in Germany (Source: VDEW, 1997)

>TABLE>

3.2. Effects of the merger: creation of a dominant duopoly

(60) Following its investigations the Commission has come to the conclusion that the notified merger would create a situation of joint market dominance by the two leading suppliers VEBA/VIAG and RWE on the German market for electricity supply at interconnected level.

(61) The German market for electricity supply from the grid presents numerous characteristics which would be likely to lead, in a situation of greater concentration resulting from the merger of VEBA and VIAG, to conscious parallel behaviour by VEBA/VIAG and RWE and thus to joint market dominance. The merger would create two strong vertically integrated blocks, which in every respect would have a strong lead on competitors on the market. This lead would be even stronger if the planned merger of RWE and VEW were to go ahead.

(62) On 30 December 1999 RWE and VEW notified their intention to merge to the Federal Cartel Office, responsible for carrying out investigations. A decision will be taken on this merger at about the same time as on the planned merger between VEBA and VIAG. Since, according to the Federal Cartel Office, the firms have offered commitments in respect of the electricity sector, and thus it is conceivable, not to say probable, that this case will be declared exempt within the applicable forecast period, this change in market structure must be taken into account in the assessment of the planned merger of VEBA and VIAG.

(63) In the Commission's view, however, what matters is not whether the merger between RWE and VEW goes ahead or not. The addition of VEW would, of course, strengthen the position of RWE and hence of the duopoly overall. And as a member of the duopoly the new entity would have a slight edge on VEBA/VIAG. But this edge would be too small to invalidate the finding that there is a dominant duopoly. RWE alone is already in a comparable position to VEBA/VIAG. While VEW would strengthen RWE's position even further, the sizes of VEBA/VIAG and RWE would remain comparable after any merger of RWE with VEW.

3.2.1. On the German market for electricity supply at interconnected level, the merger would create two comparable blocks that would have a substantial lead on the other suppliers

(64) VEBA/VIAG and RWE would have broadly similar market shares, i.e. turnover on the market for power supply from the interconnected system in Germany, and similar power generation capacity. Their combined position in both areas would place them well ahead of their competitors. This suggests that they may have a common interest in anticompetitive parallel behaviour. Aggressive competitive behaviour in a situation characterised by a balance of power affects the income of all concerned without significantly increasing sales volumes. Peaceful parallel behaviour, on the other hand, not only avoids all these disadvantages but also allows symmetrical oligopolies to maximise the profits of all involved to much the same extent. The equivalent market positions held by VEBA/VIAG and RWE suggest that such a situation obtains in the present case.

(65) The following table gives an overview of the market positions of the interconnected companies on the relevant product market as they would be if the merger took place.

Table: Market shares for power supply at interconnected level (electricity generation at interconnected level) - post-merger situation

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(66) From the above table it can be seen that VEBA/VIAG would have a market share of 36,3 %. This includes BEWAG's market share of 2,8 %, since BEWAG, as explained above, is controlled jointly by VIAG (and would be controlled jointly by VEBA/VIAG following the merger). Between them, VEBA/VIAG and RWE would have a market share of 69,4 %. Since, in addition, VEAG is already controlled jointly by VEBA, VIAG and RWE, its market share should also be added to that of the duopoly, giving the two blocks a combined market share of 81,5 %. If in view of the intended merger the market share of VEW is included, an aggregate market share of 86,8 % is obtained for the duopoly.

(67) The post-merger situation on the entire German market for electricity supply would be as follows:

Table: Electricity supply on the German market as a whole - post-merger situation

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(68) The above table shows that the duopoly would have a 77,2 % market share of total power supply in Germany.

(69) The following table shows post-merger generation capacities in Germany.

Table: Generation capacities in Germany - post-merger situation

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3.2.2. Numerous structural factors mean that, after the merger, a significant degree of competition between VEBA/VIAG on the one hand and RWE on the other hand could no longer be expected

(70) VEBA/VIAG and RWE would in future no longer compete significantly against one another. This prediction is made on the basis of the following market characteristics, which basically favour oligopolistic parallel behaviour.

3.2.2.1. Electricity is a homogeneous product, which is sold on a transparent market

(71) Electricity is a homogeneous product, and as such is not subject to further technological development. Homogeneous goods, unlike heterogeneous goods, largely possess the same physical or subjective features. Price is the main factor of competition that influences a customer's choice between various power suppliers. Other factors such as quality, research, services, reliability, etc. are of no more than secondary importance when it comes to decisions about purchases. There is also a tendency towards further standardisation of traded electricity. This is taking place, for example, against the background of the Central European power index (see following recital).

(72) The market is subject to far-reaching transparency of production costs and selling prices. There are numerous publications which collate current electricity prices offered by the power suppliers operating in Germany(17). Despite differences in the price components, for example price per kWh, or yearly or monthly charges, and differing durations of contracts or periods of notice, these overviews serve as a quick guide and allow customers to identify the most favourable offers. Although the abovementioned publications and electricity price guides are aimed first and foremost at final consumers, market prices are sufficiently transparent for customers at interconnected level. The interconnected companies try themselves to promote market transparency(18). For example, PreussenElektra, together with Dow Jones and other market participants, has developed the Central European power index (CEPI). CEPI is an index which reflects the price level in PreussenElektra's territory. The aim is to make the electricity market more transparent. The parties have, moreover, expressly referred to the practice whereby special contract customers often present competitors' price quotations in order to obtain more favourable prices from a company. Associations likewise provide their members with price comparisons. The market is made even more transparent by the fact that VEBA/VIAG and RWE can make good estimations of the market positions of all suppliers on the market for power generation on the basis of their vertical integration. Production costs and network use costs, which determine the variable costs and hence essentially the prices quoted, are thus known throughout the industry, or at any rate among the vertically integrated companies.

(73) It is true that where price is the main factor of competition on a concentrated market, this does lead to very intense competition in the first instance. However, at the same time, this also increases the interest of the market participants in avoiding competition, since every time a company undercuts a competitor's prices, this also means a reduction in its own profits. A situation of hidden competition, in which each market participant cannot be certain about the success of its offer, is different. In such a situation, a company is more inclined to make competitive moves, in the hope of winning contracts. The circumstance of competitive moves on prices being immediately felt by all market participants is a factor which in the medium term may reduce price competition. This holds true at all events for the relationship between companies with similar market shares and cost structures (i.e. similar retaliation potential) (on cost structures in the present case, see point 3.2.2.2).

(74) The drop in electricity prices, that, according to the information contained in the notification, has reached between 10 % and 50 % since liberalisation of the electricity markets, does not contradict this expectation. Although it shows that price competition is possible on the German electricity market, it must be viewed in context. First, the market is still in the initial phase of the liberalisation process, in which firms are positioning themselves on the German market described above. This phase is limited in time. Second, the abovementioned drop occurred within the market structure as it was before the merger. A market structure such as would exist after the notified merger would considerably reduce the potential for competition and with it the incentive for price competition between VEBA/VIAG and RWE.

3.2.2.2. VEBA/VIAG and RWE have comparable cost structures owing to a similarly composed stock of power stations and a number of jointly operated large power stations

(75) Future parallel behaviour is further favoured by the fact that VEBA/VIAG and RWE have similar corporate structures. They are vertically integrated at all levels of the electricity industry. They have both comparable financial strength and comparably large transmission networks, together with a comparably large stock of power stations covering all load ranges, as can be seen from the table below. Other interconnected power companies, on the other hand, are, owing to their limited capacities either in the base load range or in the medium and peak load range, dependent on the purchase of electrical energy from other producers for the load range in respect of which they are under-represented.

Table: Stock of power stations by load range (VDEW statistics: capacity and work, 1998)

>TABLE>

(76) No less than some 25 % of the electricity produced in Germany is generated by power stations operated jointly by more than one interconnected company. Many base load power stations, and in particular nuclear ones, are operated jointly by the interconnected companies VEBA/VIAG and RWE.

The power stations jointly operated by VEBA/VIAG and RWE include:

- Kernkraftwerke Grundremmingen Betriebsgesellschaft mbH, Grundremmingen: the company operates the Grundremmingen Block B and C nuclear power station; the energy that is produced belongs to the shareholders RWE Energie AG and Bayernwerk in proportion to their shareholdings of 75 % and 25 %,

- KNG Kraftwerks- und Netzgesellschaft mbH, Rostock: the company operates a hard-coal power station in Rostock, of which RWE Energie AG owns 24,6 %, VEBA 24,6 % and Bayernwerk 21,1 %. The electricity produced belongs to VEAG, which also holds an interest in the company,

- Kernkraftwerke Lippe-Ems GmbH: KLE GmbH operates the Emsland power station; RWE Energie AG owns 12,5 % of the company, and VEBA owns a further 12,5 %. The company is controlled by the majority shareholder VEW Energie AG (75 % of the shares). The electricity generated belongs to the shareholders in proportion to their shareholdings,

- Bayerische Wasserkraftwerke AG: Lech-Elektrizitätswerke AG, a member of the RWE group of companies, and Bayernwerk directly and indirectly hold 50 % of the capital of the company that operates hydroelectric power plants in Bavaria. The company is controlled by Bayernwerk. The electricity purchasing rights are essentially vested in the shareholders,

- Rhein-Main-Donau AG: 22,5 % of the company that operates hydroelectric power plants on the Rhine-Main-Danube Canal is held (indirectly) by Lech-Elektrizitätswerke AG as a member of the RWE group; Bayernwerk has a 77,49 % stake and controls the company. Lech-Elektrizitätswerke also holds 40 % of a subsidiary of RMD, Mittlere Donau-Kraftwerke AG,

- Untere Iller AG: the company operates hydroelectric power plants. It is owned 40 % by Lech-Elektrizitätswerke and 60 % by Bayernwerk AG,

- Hochtemperatur Reaktor Gesellschaft mbH: the company does not operate any operational companies, but instead serves study purposes. RWE Energie AG has a 20,3 % stake in it, and member companies of the VEBA group 36,5 %.

(77) Besides having a comparable stock of power stations, both groups of undertakings are comparably assured, through long-term supply contracts, of import capacities from abroad which are imported via the captive interconnectors which are reserved in the long term.

3.2.2.3. There are interrelationships between VEBA/VIAG and RWE which might encourage parallel behaviour

(78) VIAG has a direct shareholding in the interconnected power company VEW, so that, through the proposed merger between RWE and VEW, VIAG would obtain a direct shareholding in RWE/VEW.

(79) Moreover, the two groups of undertakings have the following joint shareholdings.

- VEAG AG: the interconnected power company VEAG generates electricity from lignite in the new Länder. RWE Energie AG owns 26,25 % of VEAG, VEBA 26,25 % and Bayernwerk 22,5 %. These three shareholders control VEAG jointly. The remaining shares are held by the other interconnected power companies VEW, EnBW, BEWAG and HEW. VEAG also operates the transmission system in the new Länder. Price moves by a member of the oligopoly would, owing to the resulting loss of custom, have a negative impact on the joint enterprise and hence on the income earned by that oligopoly member from the joint enterprise. A single oligopoly member cannot by itself determine policy in VEAG (see also recital 56).

- LAUBAG AG: LAUBAG is owned as follows by the seven west German interconnected power companies: PreussenElektra 30 %, Bayernwerk 15 %. BBS-Braunkohle-Beteiligungsgesellschaft mbH holds 55 % of the shares. BBS is owned 18,2 % by Energiebeteiligungs-Holding (consisting of BEWAG, HEW, VEW and EVS, which belongs to EnBW), 71,8 % by Rheinbraun AG, a subsidiary of RWE, and 10 % by RWE Energie. LAUBAG is the largest lignite producer in eastern Germany and, as VEAG's supplier, forms an economic unit with VEAG.

- Rhenag Rheinische Energie AG: Rhenag is 54,1 % owned by RWE Energie AG and 41,3 % by Thüga AG, in which the VEBA group has a shareholding of 56,29 %. Rhenag's main business is the supply of gas, but it also supplies electricity as a regional supplier. It has numerous minority shareholdings in municipal electricity undertakings which in addition to gas also supply electricity. The VEBA group has a substantial interest in the success of this RWE subsidiary to the extent of its abovementioned shareholding. It is represented on Rhenag's supervisory board and therefore has inside knowledge of its corporate strategy.

- In addition, there are joint shareholdings in STEAG and shareholdings owned by Envia in municipal electricity undertakings in the Land of Saxony.

STEAG AG: STEAG's main business is the generation of electricity from lignite, and it sells most of its output to RWE Energie AG and VEW Energie AG. STEAG is 26 % owned by Gesellschaft für Energiebeteiligung mbH, which in turn is 49,7 % owned by RWE Energie AG and 50,3 % directly and indirectly by VEBA. The largest shareholder is RAG AG, with 71,5 %.

Envia, a RWE group member company, has several minority holdings in municipal electricity undertakings in Saxony in which the VEBA group member company Thüga also has a minority holding.

- Further joint shareholdings exist in base load power stations in which both VEBA/VIAG and RWE own electricity purchasing rights. The joint operation of these power stations hardly calls, however, for concertation between the operating companies. Instead, base load power stations are operated on a constant supply basis so that no concertation is required between the operators regarding the increasing or decreasing of output, each operator obtaining electrical energy according to its reserved capacity. The importance of the jointly operated power stations, at least in the base load range, as regards the possibility of one duopolist gaining an insight into the commercial policy of the other, is therefore negligible.

3.2.2.4. The possibility of continuing to share customers along the lines of the former geographical monopolies facilitates parallel behaviour

(80) VEBA/VIAG and RWE were, like all German interconnected power companies, for decades up until the time of liberalisation monopolists protected by law in a supply zone demarcated from other neighbouring suppliers. The entrenched practice of maintaining closed supply zones facilitates parallel behaviour inasmuch as a suitable behaviour pattern is available. Each interconnected power company continues to occupy in its traditional supply zone a leading position with a market share of well over 50 %. The existence of the old demarcation zones accordingly eases the way for the abovementioned type of parallel behaviour on the part of the interconnected power companies.

3.2.2.5. The expected small growth in demand in turn reduces the incentive for the duopolists to engage in active competition

(81) The forecasts are for a slight increase in demand for electricity. According to an IEA study(19), electricity consumption is likely to rise only slowly. The IEA foresees an annual increase in electricity consumption of the order of 1 % between 1992 and 2010 and a 0,7 % increase between 2010 and 2020. The forecast of slow demand growth is endorsed by all market participants including the parties.

(82) Stable demand and other conditions of competition make it easier to implement parallel supply strategies. Whereas strong structural change means as a rule that coordination is much more difficult to achieve and that behaviour has to be constantly adapted and renewed, this is not necessary where market conditions are stable. In the case of market conditions which change at most slightly, adjustments are relatively simple to make. With stable market conditions, competitive moves will mainly be directed against existing players as new customers are few and far between. The sales volume attained can at most be divided up among the established suppliers. The established suppliers will therefore defend their share of sales and existing customer relations. In these circumstances, the long-term benefits to be gained from avoiding effective competition will be preferred to short-term successes flowing from engaging in competition. The small forecast demand growth accordingly favours parallel behaviour on the part of VEBA/VIAG and RWE given the level of market concentration attained.

3.2.2.6. The low price elasticity of demand likewise favours parallel behaviour

(83) Price elasticity means the ability and willingness of buyers to resort to substitute products or to withhold their custom as soon as suppliers increase the price of a product to above the competitive level. Low price elasticity encourages parallel behaviour in an oligopoly; for it can then happen that an appreciable price increase to above the competitive level leads to a growth in income despite a decline in sales.

(84) Estimates by market participants point to there being very little short-term elasticity on the relevant market, which makes oligopolistic behaviour seem likely. They refer to the limited alternatives available to buyers. Whereas other goods are substitutable or dispensable, electricity is not, in-house production or switching to other energy sources being possible only to a limited extent, very costly and extremely time-consuming. The parties have by and large not contested this assessment. They simply maintain that in the event of high electricity prices customers can switch to building small plants for in-house generation. Such plants can, however, replace only a small part of the requirements of customers at interconnected level. Building larger power stations is, on the other hand, very costly and as a rule takes longer.

3.2.2.7. VEBA/VIAG and RWE are not faced with any significant buyer power

(85) The supply side of the electricity sales market at the interconnected level is highly concentrated. The eight German interconnected power companies account for no less than 79,8 % of the installed power station capacity. They supply nearly 100 % of the electricity sold at the interconnected level; of this, VEBA/VIAG and RWE account for 81,5 % or 86,8 % (taking into account the RWE/VEW merger).

(86) Users, who are mostly regional suppliers (approximately 80 %), municipal electricity undertakings and large industrial customers, have no buyer power with which to oppose them. This is due to the fact that, with a large number of users at the high voltage level, the demand side is fragmented. Threatening to change supplier is therefore not likely to produce any substantial competitive pressure. The parties refer in their reply to the statement of objections to the combined buyer power which results, inter alia, from the "numerous cooperative purchasing ventures" involving several further distributors. Although it is true that during the course of the liberalisation process a few companies are availing themselves of the opportunity to form purchasing pools, it can also be said that the combined demand is leading to more favourable price quotations than the separate demand from individual companies. The existing cooperative purchasing ventures cover, however, only a part (the size of which is not specified, moreover, by the parties) of the demand. The fact that such pools have been formed shows, moreover, that individual buyers do not have a degree of market power such as would enable them to influence prices to an appreciable extent. The concentration of the supply side continues to bear no relation to that of the demand side. The number of regional suppliers alone comes to 80, to which must be added further buyers. The regional suppliers and municipal electricity undertakings have so far had little incentive, moreover, to engage in tough price negotiations. They still occupy a strong position in their traditional supply zones and can charge their customers high purchase prices as run-through costs.

(87) A further circumstance to be taken into account is the fact that the companies at the production level have sizeable stakes in companies at the subsequent market level, in the form of either a majority or a minority holding. In the case of majority holdings, there is no risk of a change of initial supplier. In the case of minority holdings, the opportunity to change initial supplier is likewise very rarely made use of in practice (see point 3.2.3.5).

3.2.2.8. Summary

(88) On the evidence of all market structure data, i.e. market shares, production capacities and grid size, VEBA/VIAG and RWE would tower above their competitors. Both groups would have a comparable market position and after the merger would, according to the Commission's estimates, no longer stand to gain anything from competing with one another.

(89) On the basis of the future symmetrical market positions and largely concordant corporate structures of the duopolists, the product homogeneity, the market transparency, the low price elasticity of electricity demand, the stagnant overall demand for electricity and the existing interrelationships, price competition on the part of one oligopolist is not to be expected because any such moves are readily identifiable and unpromising owing to the corresponding potential for retaliation on the part of the other oligopolist.

(90) The price fall ushered in by liberalisation and the price competition that has been evident even between the three market leaders do not militate against this analysis (see recital 74).

3.2.3. The duopoly of VEBA/VIAG and RWE or RWE/VEW will not face any significant competition from outside

(91) After the merger VEBA/VIAG and RWE would face significant competition neither from other generators nor from traders. Apart from the limited potential for competition from other generators and the limited opportunities for market entry, the underlying legal conditions governing the pursuit of business on the German market are generally unfavourable.

3.2.3.1. In addition to the extremely high market share of the duopoly, interrelationships exist with all the other interconnected power companies apart from EnBW which increase the market power of the duopoly

(92) In order to be able to estimate the extent to which the other interconnected power companies may restrict the duopoly's operational scope, the holdings which both groups have in a number of these competitors must also be examined.

- VEAG/LAUBAG: it should first of all be pointed out that VEAG cannot be regarded as a competitor of the duopoly. The company is owned 26,25 % by RWE Energie AG, 26,25 % by VEBA and 22,5 % by Bayernwerk. The remaining shares are held by the other interconnected power companies VEW, EnBW, BEWAG and HEW. As already indicated (recital 4), VEAG is controlled jointly by RWE, VEBA and VIAG. LAUBAG is the largest lignite producer in eastern Germany and as a supplier to VEAG forms an economic unit with VEAG. As already indicated (see point 3.2.2.3), LAUBAG is owned by the seven west German interconnected power companies.

VEAG generates electricity using almost exclusively east German lignite and is dependent for its supplies on LAUBAG, which in turn is dependent on the duopoly. The latter therefore exerts a decisive influence over VEAG's production costs. Owing to the fact that it predominantly converts lignite into electricity, the company is, moreover, hardly in a position to cover the medium and peak load ranges using its own production capacities. And on the customer side, VEAG is dependent on the seven east German regional suppliers, which in turn are owned by one of the west German interconnected power companies.

- BEWAG: the interconnected power company generates electricity in Berlin. The company is owned approximately 26 % by Southern Company, approximately 26 % by VIAG and 23 % by VEBA, which has 20 % of the voting rights. The company is currently controlled by VIAG and Southern. BEWAG does not possess any base load power stations and therefore has to purchase base load electricity.

- HEW: VEBA holds a 15,4 % share in HEW directly and another 15,4 % share indirectly through Sydkraft, in which it has a 17,6 % interest. HEW is a small interconnected power company with limited production capacities and only a small transmission grid. All of its base load power stations are operated in conjunction with its competitor PreussenElektra. Vattenfall has acquired joint control of HEW by pooling its 25,1 % interest with that held by the municipality of Hamburg(20). Although HEW will be jointly controlled by Vattenfall and the municipality of Hamburg, as a minority shareholder with a seat on the supervisory board VEBA is privy to HEW's main decisions and strategies. Its shareholding enables it to obtain information on HEW's price strategy and on any quantities purchased, together with the prices, through, for example, VEBA's interconnector with Denmark. A strengthening of HEW's competitive position through Vattenfall's shareholding, owing, for example, to the availability of cheaper electricity generated in Scandinavia, is, irrespective of the infusion of fresh capital, unlikely for the time being. HEW's high voltage grid is not linked up to any grids abroad, as a result of which HEW's access to imported electricity is largely subject to the same restrictions as access by foreign suppliers to the German market (see above). Vattenfall is dependent when it comes to supplying its affiliate HEW from Scandinavia on free capacities of the interconnectors between Germany and Denmark or Sweden. On the German side, the link-up between Germany and Denmark is operated by the duopolist PreussenElektra. However, the interconnectors have only limited free capacities, with the result that Vattenfall will be able to supply HEW only with negligible quantities. What is more, the interconnector capacity with Sweden is useable to only a relatively small degree.

- VEW: VIAG also has (direct and indirect) shareholdings in VEW. As in the case of HEW, VIAG has by reason of this shareholding a seat on VEW's supervisory board and hence is privy to its corporate strategy. Following the proposed merger with RWE, VEW will, moreover, cease to be an independent supplier on the market.

(93) EnBW is currently the only supplier at the interconnected level in which no interest is held by another German interconnected power company. The acquisition by EdF of a minority holding in EnBW is still at the planning stage. EdF intends to acquire joint control of EnBW by pooling its minority rights with the shares held by another shareholder. At all events there are linkages between EnBW and the duopoly in the area of power-station operation.

(94) Even allowing for EdF's strength in terms of resources, there are no grounds for maintaining that EnBW would be in a position to limit effectively the duopoly's freedom of behaviour. In the first place, it is to be expected that, since other powerful external competitors are lacking, EnBW will refrain from strong competition in the duopoly's area, which covers almost the whole of Germany, and will fall in with the duopolists' behaviour. This seems obvious given the knowledge of the retaliatory potential of the market-leading interconnected power companies belonging to the duopoly. Secondly, stepping up the procurement of cheap electricity from EdF is scarcely possible in view of the limited capacity of the interconnectors.

(95) Moreover, VEBA/VIAG and RWE hold interests in electricity generators in neighbouring countries which confer on them rights to generating capacities. They can make use of these capacities at least to a limited extent via the interconnectors they control. RWE thus holds a 40,31 % interest in SEO, a pumped storage station operator. In the Netherlands PreussenElektra holds an 87 % interest in EZH, one of the four major generators. PreussenElektra also holds 10 % of the Swiss generator BKW. Bayernwerk and EnBW each hold 24,5 % of Watt AG, which is already active on the German market in the importing sphere. RWE and EdF also each hold 20 % of the shares in Motor-Columbus, which in turn holds 56,5 % of ATEL. BKW, Watt and ATEL own about 23 % of Swiss electricity generating capacity.

(96) After the merger, VEBA/VIAG and RWE would therefore have a long lead over their nearest competitors. The position of these interconnected power companies is even weaker than is apparent from their market shares as VEBA/VIAG and RWE hold substantial interests in most of their competitors. Meaningful competition is not therefore to be expected from these interconnected power companies.

3.2.3.2. The duopoly will control by far the greatest part of installed generation capacity and almost all free generation potential

(97) After the merger VEBA/VIAG would control about 30 % of total generation capacity in Germany. VEBA/VIAG and RWE together have about 50 % of generation capacity. If account is also taken of the capacity of VEW, VEAG and BEWAG, the duopoly would, after the proposed RWE/VEW merger, control over two thirds of total installed generation capacity (see above).

(98) As has been explained above (recital 57), electricity generated by industry is in any case available to the free market only to a limited extent. Likewise, electricity generated by regional and local energy suppliers is mainly intended to meet their own requirements. The main factor for competition is therefore the share of installed generation capacity at interconnected level; at this level the duopoly will control about 60 % to 65 % (including VEW) of total capacity.

(99) In this connection it is also significant that there is a close, historical link between generation and network. As a result of this link the existing network architecture does not allow the complete substitution of all power stations in an interconnected area through supplies of electricity from outside. It follows that interconnected companies have to some degree non-substitutable generation capacity and thus assured markets. The greater the generation capacity that is tied into existing networks through a merger, the bigger the electricity markets will be that are protected from competition for structural reasons.

(100) It can also be perceived on an examination of the enterprises' stock of power stations that the free generation potential or overcapacity for all load ranges is predominantly held by members of the duopoly. The following survey provides an overview of overcapacity of the individual interconnected generating companies.

Table: Free generation potential of power stations by load range (VDEW statistics: capacity and work, 1998)

>TABLE>

(101) Although the parties have asserted that VEBA/VIAG and RWE have no overcapacity in the base load range, they have not backed up this assertion with any evidence.

(102) The members of the duopoly have it in their power to leave the abovementioned overcapacities unused or even to reduce them in parallel in order to stabilise the price level.

(103) At the oral hearing the parties stated that these overcapacities would stimulate competition. During by far the larger part of an assessment period, there was more to be gained, they stated, from utilising them than from increasing prices.

(104) No written evidence was produced, however, to support these statements. The Commission is accordingly not in a position to verify the figures. In their arguments the parties also assume that the duopoly's capacity remains unchanged. They thereby ignore the possibility for the duopoly to extend its parallel behaviour to the closure of capacity.

3.2.3.3. The duopoly will control by far the greatest part of the transmission network in Germany

(105) Without including VEW and leaving aside VEAG, which they control, VEBA/VIAG and RWE by themselves will control 52 % of the German transmission network. The duopoly's competitors are dependent on it for use of this network in order to compete with it. In addition, the transmission network as a whole covers the greater part of Germany.

Table: Transmission network in Germany (source: VDEW, 1997)

>TABLE>

(106) In addition, the network, by reason of its scope, and the ownership of the network links within Germany and interconnectors enable the members of the duopoly to steal a significant march in information matters over their competitors.

(107) Through their ownership and operation of the network links/interconnectors and the network, the interconnected companies obtain information on load flows and quantities supplied by competitors and an outline of loads used by suppliers. Although, in organisational terms, network operation is separated from the electricity trade and distribution, there is evidence to suggest that in individual cases sensitive network operation data concerning competitors of the interconnected companies come to the knowledge of interconnected companies' sales divisions. Such claims were also made by competitors of the parties at the hearing.

(108) A further advantage over competitors that ownership of the network confers on members of the duopoly is the settlement procedures for balancing energy that are fixed for transit operations under Associations Agreement II (see point 3.2.3.6).

(109) The general point should be made that in Germany the transmission network is not operated by an independent undertaking. Instead, it is owned by various interconnected companies and operated by them. The interconnected companies have set up subsidiaries to operate the network. In doing so they had regard for the minimum requirements contained in the Electricity Market Directive and carried out management unbundling and unbundling of accounts to separate operation of the transmission network from their activities as electricity producers and suppliers. However, this measure has not been accompanied by any economic separation and network operation and electricity production and supply remain in the same vertically integrated group so that discrimination remains possible against competitors who rely on through-transmission via the network. By virtue of the negotiated network access, it is possible to harm the competitive opportunities of competitors, especially traders, in favour of the interconnected companies' own production companies by way of combined costing through high through-transmission charges and correspondingly low electricity supply prices. In such circumstances there is little incentive to apply transparent tariffs which can be checked to see how they stand in relation to costs and to the rules of Associations Agreement II on through-transmission. This holds true especially where, as would be the case once the planned merger was completed, by far the greatest part of a national network is dominated by only two groups which, as indicated, can be expected to engage in parallel behaviour. It must also be borne in mind here that both blocks operate on downstream markets where they can fend off competitors through a lack of price transparency and use income for competition purposes at the interconnected level.

3.2.3.4. There are significant barriers to entry to the market, as regards both the creation of new capacity and imports. Imports, which are possible only to a limited extent and are mostly effected via interconnectors controlled by members of the duopoly, cannot restrict the duopoly's operational scope

(110) Potential suppliers are unable to present an effective challenge to the parties' strong position on the market. This is because of the high barriers to entry to the German market.

(111) Entry to the market in the supply of electricity at the interconnected level in Germany entails considerable investments. These to a large degree form sunk costs, i.e. they are applicable to one product market only and have no application to activities on other markets. These costs include the production-level investments in power stations. Even after the liberalisation of the German electricity market, market entry at the production level entails incurring considerable costs over a long period because of the necessary investment in power stations. Given the statutory right of through-transmission, however, the development of an independent transmission network is no longer necessary since production companies are able to use the transmission networks of other market operators on non-discriminatory terms. Since VEBA/VIAG and RWE hold the major part of German generation capacity, any market entry entails the risk that the members of the duopoly will apply their overcapacity so as to force the newcomer off the market by lower prices. This also makes it more difficult de facto for electricity traders to enter the market.

(112) Consequently, even after liberalisation, market entry entails high costs so that the previously existing substantial barriers to entry to the German market in the supply of electricity at the interconnected level remain. This is shown clearly by the fact that market entry at production level has in general proceeded by an enterprise taking a holding in an existing production company. Thus the Swedish enterprise Vattenfall took a holding in the interconnected company HEW. The Finnish enterprise Fortum took over the Wesertal electricity plant. However, entry to the market through the construction of a company's own generating capacity remains the exception. The Commission knows of few cases where suppliers have tried to secure access to the market by building their own generating capacity. Thus Fortum has established a power station in the new Länder to strengthen its electricity-generation base in Germany; likewise, the American company NRG Energy has taken a holding in a power station.

(113) Moreover, it should be borne in mind that opportunities for importing electricity are limited because the available capacity of interconnectors is extremely limited. An increase in interconnector capacity is unlikely in the years ahead, at least in the present political climate, owing to the related costs and the requisite authorisation procedure. As the parties stated at the hearing, it takes up to two years just to build the overhead lines, to which must be added the time it takes for the official authorisation procedure and the requisite analysis of the load on the downstream networks.

(114) To conclude, barriers to access to the market in the supply of electricity at the interconnected level in Germany are very high. The amount of the necessary investment and the lack of access from abroad because of the limited capacity of the interconnectors restrict competition for the VEBA/VIAG and RWE groups. In view of the two blocks' significant resources and their resulting retaliatory powers, and the wide gap between them and the other operators on the market, there is no reason to expect robust competition from current or potential suppliers, whose room for manoeuvre could be effectively controlled by the two groups.

3.2.3.5. With their numerous holdings, the members of the duopoly enjoy a strong position on downstream markets enabling them to secure their market base at the expense of their competitors

(115) The market position of VEBA/VIAG and RWE is further strengthened by numerous holdings in undertakings at the downstream market stage. These holdings give the members of the duopoly decisive influence on the purchasing policy of the undertakings so that the two groups can secure their market base and at the same time seriously impair their competitors' marketing opportunities. The following survey provides an overview of the holdings of the members of the duopoly.

Table: Sample of holdings of the interconnected companies VEBA, VIAG, RWE and VEW in regional supply companies (RVU) and municipal electricity undertakings (SW)

>TABLE>

(116) In many cases, these are majority holdings in distribution companies and the various members of the duopoly, as controlling undertakings, are able to determine their purchasing decisions directly. Even where the members have minority holdings they can nevertheless exercise substantial influence on the purchasing policy of the companies whose shares they hold.

(117) The majority shareholders in those associated companies are one or more municipalities, which are usually represented on the company boards through municipal office holders. However, from the undertakings' standpoint the interest is solely in energy-supply companies with minority holdings. Because of the particular skills of PreussenElektra, Bayernwerk and RWE in the energy and management fields, the holdings of members of the duopoly in redistributors and their representation on their boards have in fact significantly greater weight than the extent of each holding and their quantitative presence on the company's governing bodies would indicate.

(118) Energy and management know-how is in large part introduced into the enterprise through the interconnected company. The interconnected company and the other company are normally linked by a supply contract that covers the total outside supplies required by the regional supply company or municipal electrical undertaking. The Commission's investigations have shown that distribution companies in which an interconnected company has a holding have hitherto scarcely exploited the opportunities afforded them by liberalisation and have remained with their previous suppliers. It is correspondingly difficult for other operators, such as importers, electricity traders or other interconnected companies to acquire customers in this category. The minority holdings that are held by VEBA/VIAG and RWE in particular in distribution companies thus strengthen the duopoly's position and create additional difficulties for other operators trying to establish themselves on the German market.

(119) In those circumstances, the parties have comprehensive means of bringing influence to bear on the decisions concerning electricity purchases made by many regional and local supply enterprises. Even if in future competitors developed significant electricity-generating capacity in Germany, they would have to operate that capacity in severely restricted competition with members of the duopoly. Given the existing close links between the abovementioned regional and local suppliers and the interconnected companies, the duopoly's competitors lack adequate access to the market at production level that would enable them to offer significant and, above all, geographically comprehensive competition. This affects the market in electricity supplies at the interconnected level since it does not make economic sense to generate considerable quantities of electricity in competition with the duopoly unless there is an adequate opportunity of marketing it.

3.2.3.6. The terms of Associations Agreement II, particularly concerning the T-component and balancing energy, give the duopoly further advantages over competitors

(120) The provisions of Associations Agreement II, which appear to indicate a significant improvement over those of Associations Agreement I, contain certain clauses that, particularly for competitors of the interconnected companies, create serious barriers to through-transmission and thus mainly serve to further consolidate and strengthen the position of the market leaders, the interconnected companies.

(121) Foreign suppliers must continue to pay the T-component at the rate of 0,125 pfennig/kWh when they import electrical energy into the Federal Republic of Germany. The T-component also applies within Germany (at the rate of 0,25 pfennig/kWh) for all electricity traders and electricity generators that are unable to achieve a balance in supplies between the north and south trading zones. According to information obtained from electricity traders, in certain circumstances payment of the T-component can reduce traders' margins to zero. Only those companies that can offset the quantities of electricity supplied by them against the quantities of electricity which cross the trading zone boundary in the other direction need not pay the T-component. In this respect the members of the duopoly enjoy significant advantages. VEBA and VIAG will have available an extensive supply area covering both trading zones. Although RWE operates in only one trading zone at present (the same applies to VEW), its status as a major interconnected company gives it an advantage in offsetting electricity with other interconnected companies operating in the other trading zone. After the proposed merger, the supply area of the merged entity will also cover both trading zones. By contrast, smaller interconnected companies and electricity traders find it relatively more difficult to offset energy supplies.

(122) Under Associations Agreement II, the offsetting arrangements for balancing energy confer a further advantage on the members of the duopoly. Since final consumers' energy consumption fluctuates, in the course of long-term supplies the level of energy purchased is frequently above or below the contractual amounts. The technical rules mean that the balance, i.e. the deficit or excess, must be balanced by the network operator for his balancing area. This means that balancing energy is bought in or sold. Associations Agreement II applies in principle to systemic services that are necessary for the transmission and distribution of electrical energy and determine the quality of electricity supplies, for example demands on balancing energy, to within tolerances of +/- 5 %. Additional payments are required if a standard tolerance of +/- 5 % of the reference value is exceeded. On payment of a higher through-transmission charge an applicant can choose a wider bracket of +/- 10 % or 20 %. Balancing energy can generally be provided only by transmission network operators within their balancing areas or by suppliers operating a power station in the balancing area to which electricity is supplied. According to market operators, the price charged by transmission network operators for supplying balancing energy under Associations Agreement II is considerably higher than under Associations Agreement I. The market operators consulted by the Commission claim that the price for supplying balancing energy under Associations Agreement II significantly exceeds the cost of providing the energy. The fact that balancing energy is constantly kept ready for cases where it is necessary plays a relatively important role in the calculation. For example, if the 5 % tolerance band is exceeded just once, the amount charged is based on an assumption that it was exceeded for one month. This is liable to prove a burden, especially for suppliers with comparatively low quantities of sales of electricity. In those circumstances, with this method of calculation electricity traders risk losing their profit margins.

(123) By contrast, the prices for balancing energy entail scarcely any burden for members of the duopoly. This is mainly because, with their prominent position on the market and large sales volume they can much more easily offset consumption fluctuations within their balancing areas and thus incur significantly lower costs for balancing energy. Also, interconnected companies, which, as network transmission operators, are in fact the main suppliers of balancing energy, usually supply each other with balancing energy against payment in kind, according to market operators. The parties state that the interconnected companies provide each other with energy on a reciprocal basis to a limited extent, at all events where there is an unintentional exchange of energy or a power station failure, so that no costs arise for balancing energy. Competitors that are not interconnected are often dependent on interconnected companies for supplies of balancing energy. They are naturally dependent on members of the duopoly in particular since they cover a large part of the area of the Federal Republic of Germany.

(124) In addition, Associations Agreement II does not contain any provisions on management of bottlenecks where the network is subject to restrictions in Germany. The result is that transferor companies sometimes give priority to requests for transfers from their own group, invoking network-safety issues and technical difficulties, and merely offer competitors the use of any remaining free capacity.

(125) Any competitors of members of the duopoly that do not have their own transfer network available are therefore adversely affected by the arrangements on use of the network. The prominent position on the market held by VEBA/VIAG and RWE is therefore consolidated by the arrangements on use of the networks belonging to them.

3.2.3.7. Control of by far the major part of generation capacity, the transmission networks and network-link capacity with neighbouring States give the duopoly decisive influence over the electricity trade that is developing in the wake of liberalisation

(126) According to the Commission's current information, the electricity traders already operating on the market are likewise unable to restrict the operational freedom the market structure allows the parties.

(127) Since the liberalisation of the German electricity market in 1998, all consumers have been entitled to choose their suppliers. This situation has influenced the operations of both producers and independent electricity traders. The existing interconnected companies have in large part extended their operations beyond the traditional interconnected areas. Independent wholesale electricity traders, such as Enron, Fortum and Vasa Energy, have newly entered the market. Those traders have so far concentrated on short-term spot supplies and have concluded long-term contracts only in exceptional cases. Their own capacity for electricity generation is negligible, so that they correspondingly depend on access to free capacity.

(128) The operators on this market consider that an essential condition for a market in electricity trade which will have a decisive impact on the duopoly's ability to determine prices is that adequate liquidity should be present on the market. The overcapacity available to independent electricity traders is mainly owned by VEBA/VIAG and RWE, as has been pointed out above. They therefore have a large measure of freedom to determine prices since other producers are unable to meet demand fully. Both groups of companies would therefore be able to determine how much electricity independent electricity traders on the German market receive and to exercise permanent control on prices.

(129) The same consideration applies to the trade through the German electricity exchanges, which are intending to begin operations in the autumn of this year. In the LPX's view, it is a condition for a properly functioning exchange performing the essential task of price formation that 15 % to 25 % of national physical consumption can be traded on the exchange. In view of the high concentration of generation capacity held by VEBA/VIAG and RWE, the two groups can determine the success of the exchanges and thus determine whether their competitors succeed and make profits.

4. Conclusion

(130) In summary, the Commission has come to the conclusion that the merger of VEBA and VIAG would considerably deteriorate the structures on the German market for the provision of electricity from the grid. Competition would be critically weakened as a result of the emergence of a duopoly, (VEBA/VIAG and RWE or RWE/VEW). Because of their dominant market position and access to resources such as power stations, transmission grids and grid transfer points, the duopoly could largely shield the German market from competition and, in addition, prevent the emergence of a properly functioning market for trade in electricity. The merger would therefore lead to the creation of a joint dominant position.

B. CHEMICALS

(131) VEBA operates in chemicals through its subsidiaries Degussa-Hüls AG and VEBA Oel AG (petrochemicals). The chemical interests of the VIAG group are handled by its subsidiaries SKW Trostberg AG and their subsidiary Goldschmidt AG. The Commission has come to the conclusion that the merger will strengthen further a dominant position on the markets for sodium dicyanamide and cyanuric chloride.

B.1. SODIUM DICYANAMIDE

1. Relevant product market

(132) Sodium dicyanamide is a product of hydrocyanic acid /chlorine cyanide chemistry which arises from the synthesis of (highly-poisonous) chlorine cyanide and cyanamide. As chlorine cyanide is an unusually dangerous substance, the production of sodium dicyanamide is closely linked geographically to that of chlorine cyanide.

(133) Sodium dicyanamide is used chiefly as an intermediate product for the production of the active substances polyhexamethylene biguanide (PHMBG), chlorhexidine and proguanil. PHMBG is used for preservation and sterilisation in the technical field. By volume the most important use is as a chlorine-free biocide for swimming pools. PHMBG is also used in the food industry, for example in meat-processing and brewing, to clean vats and pipes, as it is non-toxic and does not corrode sealing. In the oil industry it is employed in pressure tests on pipelines, as it kills off unwanted organisms, but not sulphur-decomposing bacteria, such as those added to petroleum with high-sulphur content. Chlorhexidine is a disinfectant used on humans and on animals forming part of the human food chain, for example in human medicine (surgery) and veterinary medicine (disinfecting udders), in the manufacture of cosmetics and in contact-lens cleaning fluid. Proguanil is used as a remedy against malaria. Sodium dicyanamide is also used in the agri-chemicals industry as a herbicide.

(134) The customers asked for their views stated in unison, and unchallenged by the parties, that sodium dicyanamide is for them a key intermediate product, which cannot be replaced by any other intermediate product. Even if another intermediate product were available in the foreseeable future, its use would imply considerable adaptations to the production process and the re-registration of products manufactured hitherto from sodium dicyanamide and all other subsequent uses - a lengthy and expensive process. The Commission therefore assumes that sodium dicyanamide should be regarded as the relevant product market.

2. Relevant geographic market

(135) The parties base their arguments on a worldwide market for sodium dicyanamide. The firms asked to submit their views make the same assumption. The assessment can therefore be based on a worldwide market.

3. Competition assessment

3.1. Present market situation

(136) At present, only two firms in the world produce sodium dicyanamide in large quantities - Degussa and SKW. The parties also cite Avecia Ltd, Manchester (United Kingdom). However, its production process does not yield isolated sodium dicyanamide, but an intermediate product (HMBDA), which is used in turn to obtain chlorhexidine and PHMBG. This intermediate product is manufactured only by Avecia and is not available on the market, as Avecia does not trade in HMBDA. The Swiss firm Lonza AG (Lonza) produced sodium dicyanamide up to 1998, but then closed down production and since then has been selling on goods it obtains from [...](21). The parties expect Lonza to resume production in the second half of the year.

(137) The capacity of the plant at which SKW produces sodium dicyanamide has been increased from [...] tonnes (1996) to [...] tonnes (1999). Degussa manufactures it at a multi-product plant for which it quotes an annual capacity for sodium dicyanamide production of around [...] tonnes. Degussa uses sodium dicyanamide to produce chlorhexidine in the form of chlorhexidine base and chlorhexidine digluconate. [...] obtains from Degussa a product of sodium dicyanamide, hexa-methylene biscyanoguanidine (HMBCG), which it processes further to produce chlorhexidine base and chlorhexidine salts. [...] also purchases sodium dicyanamide.

(138) The parties estimate that world production of sodium cyanamide comes to somewhere between around 900 and 1300 tonnes per annum (tpa), including between [...] and [...] tpa attributed to Avecia. They disregard the fact that Avecia produces no isolated sodium dicyanamide. The estimated figures for Asian producers cited by the parties have not been confirmed by Commission investigations.

(139) Subtracting the parties' production estimates for Avecia from their estimates for total world production leaves a remainder of no more than [...] tonnes, which is roughly equivalent to the entire production of the parties in 1998 (around [...] tonnes). On the basis of the parties' estimates, this leaves no more than [...] tonnes for production by other firms. If one starts from a world production figure of around [...] tonnes, SKW has a share of around [50 % to 60 %] and the parties together have a share of [< 100] %. If one subtracts from this figure the amounts produced by the parties for their own use, this leaves a market volume of around [...] tonnes, of which [...] tonnes, or [60 % to 70 %], is accounted for by SKW.

(140) Degussa states that it does not actively market sodium dicyanamide, but manufactures it for use within its business group for the production of chlorhexidine. However, in the past, it has provided occasional, supplementary supplies to [...], in some cases even delivering the goods direct to [...]'s customers.

(141) At present, buyers of sodium dicyanamide have two suppliers to choose from - Lonza and SKW. Even a cautious analysis shows that SKW supplies over two thirds of the market. In these circumstances SKW can be said to have a dominant position on the market.

(142) Nevertheless, the presence of Lonza does at present provide customers with some scope for responding to excessive price demands on the part of SKW by reducing the amounts they order. In this respect, the extent of Lonza's operations on the market depends on the amount of sodium dicyanamide which Degussa is prepared to supply. For its part, Degussa contributes to the supply of the market by its deliveries to Lonza. Before the merger Degussa could also be seen as a potential competitor in the market in question.

(143) With the exception of AstraZeneca, all the firms which require large quantities of sodium dicyanamide are small and medium-sized businesses. AstraZeneca uses sodium dicyanamide to produce proguanil, which is marketed under the Paludrin brand, and requires only comparatively small quantities of sodium dicyanamide for this purpose.

3.2. Effects of the merger

(144) First of all, the merger will eliminate Degussa, which is now also in contact with Lonza's customers, as a potential competitor. Similarly, the new market-dominant entity will have no interest in supplying Lonza, its only competitor. From this angle the merger will mean, at the very least, a further weakening of Lonza's position as