2004/135/EC: Commission Decision of 26 September 2001 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.2434 — Grupo Villar Mir/EnBW/Hidroeléctrica del Cantábrico) (Text with EEA relevance.) (notified under document number C(2001) 2861)
Date: 2001-09-26
Institutions: European Commission
Subjects: Spain, application of EU law, dominant position, economic concentration, electricity supply, merger control

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Official Journal of the European Union

18.2.2004

COMMISSION DECISION

of 26 September 2001

declaring a concentration to be compatible with the common market and the functioning of the
EEA Agreement

(Case COMP/M.2434 — Grupo Villar Mir/EnBW/Hidroeléctrica del Cantábrico) (a)

(notified under document number C(2001) 2861)

(Only the Spanish version is authentic)

(Text with EEA relevance)

(2004/135/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Com-
munity,

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) 1310/
97 (2), and in particular Article 8(2) thereof,

Having regard to the Commission’s Decision of 1 June 2001
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,

Having regard to the opinion of the Advisory Committee on
Concentrations (3),

Whereas:

(1) On 4 April 2001 the Commission was notified, under
Article 4 of Council Regulation (EEC) No 4064/89 (the
Merger Regulation), of a proposed merger in which the
firms Grupo Villar Mir and Energie Baden-Württemberg
(EnBW), the latter jointly controlled by Electricité de
France (EDF) and Zweckverband Oberschwäbische Elek-
trizitätswerke (OEW), were to acquire joint control of
the Spanish firm Hidroeléctrica del Cantábrico SA
(Hidrocantábrico), by means of a public takeover bid by
Ferroatlántica SL (Ferroatlántica). Ferroatlántica belongs

(a) See the final report of the Hearing Officer in OJ C 42, 18.2.2004.
(1) OJ L 395, 30.12.1989, p. 1; corrected version OJ L 257,

21.9.1990, p. 13.

(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 42, 18.2.2004.

(2)

(3)

(4)

(5)

to Grupo Villar Mir and, after completion of
the
operation, is to be jointly controlled by Grupo Villar Mir
and EnBW.

The notification was declared incomplete on 6 April
2001. On 10 April 2001, the notifying parties provided
the additional information requested. The notification
was completed, within the meaning of Article 10(1) of
the Merger Regulation, on that date.

After examining the notification, the Commission con-
cluded that the operation fell within the scope of the
Merger Regulation.

By letter dated 14 May 2001, the Spanish authorities
informed the Commission, in accordance with Article 9
of the Merger Regulation, that the proposed merger
would create or strengthen a collective dominant pos-
ition as a result of which effective competition would be
significantly impeded in the electricity generation market
in Spain. They stated that the merger would also affect
the market in distributing and trading in electricity
in the Autonomous Community of Asturias, which
presented all the characteristics of a distinct market and
was not a substantial part of the common market.
The Spanish authorities therefore requested that the
proposed merger be referred back to them in accordance
with Article 9 of the Regulation.

After a preliminary examination of the case, the Com-
mission concluded that the proposed operation raised
serious doubts as regards its compatibility with the
common market, as it could create or strengthen
a dominant position as a result of which effective
competition would be significantly impeded in the
common market or in a substantial part of it. Conse-
quently, on 1 June 2001 the Commission decided to
initiate proceedings under Article 6(1)(c) of the Merger
Regulation.

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(6)

The Advisory Committee discussed the draft Decision
on 13 September 2001.

I. THE PARTIES AND THE OPERATION

(7)

(8)

(9)

Grupo Villar Mir, whose parent company is Inmobiliaria
Espacio SA, is a business group with various interests in
the following areas: real estate, fertilisers, construction,
operation of infrastructure and service concessions and
management of financial investments.

EnBW, which is jointly controlled by EDF and OEW, is
a vertically integrated electricity company whose main
activity is the generation, transmission, distribution,
trading and supply of electricity, principally in south-
west Germany.

EDF is a State-owned company whose main activities
are the generation, transmission, distribution and trading
of electricity in France. Through EDF/RTE, a division
of EDF,
it operates the national electricity grid and
interconnectors with neighbouring countries. Through
its subsidiary EDF International (EDFI), a holding com-
pany, EDF owns shares in electricity companies in
various European countries,
Italy,
Sweden and the United Kingdom. It is also involved in
the construction sector, the maintenance of electricity
generating plants and transmission grids, recycling and
city lighting.

including Austria,

(10)

Ferroatlántica produces, distributes and markets various
types of metal and electric furnace-produced ferrous
alloys, both for the home and export markets, and also
produces hydroelectric power. It is owned outright by
Grupo Villar Mir and will, on completion of
the
proposed operation, be jointly controlled by Grupo
Villar Mir and EnBW, which will acquire 50 % of its
capital.

(11) Hidrocantábrico is involved in the generation, distri-
bution and marketing of electricity and is currently the
fourth biggest Spanish electricity company. Outside the
electricity sector, its main activities are essentially the
distribution and marketing of gas and its involvement in
the telecommunications sector in the Autonomous
Community of Asturias.

stock, authorised by the National Stock Market Com-
mission (CNMV) on 17 January 2001. Subsequently,
two other public bids were made for the whole of
Hidrocantábrico’s stock, one by the group formed by
the savings bank Caja de Ahorros de Asturias (Cajastur),
the Portuguese electricity company Electricidade de
Portugal SA (EDP) and Caja de Seguros Reunidos,
Compañía de Seguros y Reaseguros SA (Caser), and the
other by the German group RWE. RWE’s offer was later
withdrawn. Ferroatlántica, as the first company to make
a public bid, amended its initial offer, raising its bid to
100 % of the company’s shares and offering improved
terms. After the bidding process was completed, the
group formed by Cajastur, EDP and Caser owned 35 %
and Ferroatlántica 59,66 % of Hidrocantábrico’s shares.

II. CONCENTRATION

(13) According to the agreements concluded by Grupo Villar
Mir and EnBW, each of the companies will own a 50 %
share of Ferroatlántica (the vehicle for the acquisition of
control of Hidrocantábrico). As a result, Grupo Villar
Mir and EnBW will jointly control Hidrocantábrico.

(14)

Following the bidding process, Ferroatlántica acquired
59,66 % of Hidrocantábrico. According to the notifying
parties, under the articles of association of Hidrocantá-
brico as amended at the shareholders’ general meeting
of 22 May 2000, the acquisition of a clear majority
shareholding in Hidrocantábrico after a public bid for
100 % of the shares at a price of at least EUR 24 grants
the notifying parties sole control of Hidrocantábrico.
Ferroatlántica would have an absolute majority of voting
rights and the right to appoint the majority of the
members of the Board of Directors.

(15) As far as the assessment of joint control is concerned,
this Decision is adopted on the basis of the information
provided by the Parties and does not affect any rights
and obligations that the various shareholders’ groups
may have under Spanish law.

(12) The proposed operation is the acquisition of

joint
control of Hidrocantábrico by Grupo Villar Mir and
EnBW, by means of EnBW’s purchase of 50 % of
Ferroatlántica’s shares. To this end, the Parties concluded
a number of agreements. On 28 September 2000,
Ferroatlántica, with the support of EnBW, made an
initial public takeover bid for 25 % of Hidrocantábrico’s

(16)

In the light of the above, the notified operation consti-
tutes
of
Article 3(1)(b) of the Merger Regulation.

concentration within the meaning

a

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III. COMMUNITY DIMENSION

(17) The companies involved in the proposed operation
(Grupo Villar Mir, EnBW and Hidrocantábrico) have a
combined aggregate worldwide turnover in excess of
EUR 5 billion (Grupo Villar Mir: EUR 918 million;
EnBW: EUR 38 billion (4); Hidrocantábrico: EUR
890 million). Each of them has a turnover in the
Community of more than EUR 250 million (Grupo
Villar Mir: EUR 843 million; EnBW: EUR 36 billion;
Hidrocantábrico: EUR 890 million) and they do not
achieve more than two thirds of their Community-wide
turnover in one and the same Member State. The
proposed operation therefore has a Community dimen-
sion.

IV. RELEVANT MARKETS

(20)

A. RELEVANT PRODUCT MARKETS

(18) As the Commission indicated in its Decision in Case
COMP/M.1853 — EDF/EnBW,
the relevant product
markets in the electricity sector must be defined accord-
ing to the existing degree of liberalisation. The supply of
electricity to tariff customers is a legal monopoly in
which there is no competition. The relevant product
market must therefore be viewed in the context of the
liberalised segment of the market.

(19) According to the definition formulated by the Tribunal
de defensa de la competencia (Spanish Competition
Court) ‘the relevant product market must be defined as
the generation of electricity that is bought and sold
through the pool or wholesale market. On the supply
side in this market, electricity from the generators (5) is
in competition with that from the special “over 50 MW”
scheme and imported electricity. On the demand side,
there are the distributors [who sell electricity to tariff
customers]* (*), traders [who sell electricity to eligible

(*) Parts of this text have been edited to ensure that confidential
information is not disclosed; those parts are enclosed in square
brackets and marked with an asterisk.

(4) These figures include the turnover of OEW and EDF for the
purpose of calculating the relevant turnover in accordance with
the provisions of the Merger Regulation.

(5) Endesa, Iberdrola, Unión Fenosa, Hidrocantábrico and other small

generators.

It also includes
customers]*, and eligible customers.
the electricity sold via bilateral contracts [between
generators and eligible customers]*, in so far as these
contracts are agreed upon in a system of free compe-
tition’ (6). Until 2003, Spanish generators are not allowed
to conclude direct contracts with traders (they can only
sell electricity in the pool or to eligible customers) (7).
External agents can conclude contracts with Spanish
traders.

Eligible customers in the Spanish market are those
consumers, regardless of their level of consumption,
who are supplied at a nominal voltage of more than
1 000 volts (8). From 1 January 2003, all consumers of
electricity, without distinction, will have the status of
eligible customers, even though electricity will continue
to be offered in the tariff market up to 1 January
2007 (9). Eligible customers in Spain who wish to
buy electricity under the liberalised system have three
options: (a) through the pool, (b) by means of ‘bilateral
foreign operators or
contracts’ with generators or
(c)
for
through contracts with traders. The market
eligible customers potentially represents 54 % of con-
sumption in Spain, but those who have chosen to buy
electricity in the liberalised market (directly through the
pool or via bilateral contracts or contracts with traders)
represent 35 to 38 % of total consumption. In other
words, 62 to 65 % of the electricity bought in the
for
wholesale market
subsequent supply to tariff customers.

is purchased by distributors,

(6) Report C-60/00 on the Endesa/Iberdrola merger.
(7) Article 21 of Royal Decree-Law No 6/2000 of 23 June 2000 on
urgent measures to step up competition in goods and services
markets (Spanish Official Gazette No 151, 24.6.2000, p. 22440).
However, this in no way entails the disappearance of the pool.
Article 21 of Royal-Decree Law No 6/2000 itself states that (as of
2003) traders will be able to conclude contracts for the acquisition
of electricity from national producers in the normal way and
concludes that ‘this energy may be sold to eligible customers or be
incorporated into the existing daily or intradaily markets’ (i.e. the pool).
(8) Article 6 of Royal Decree-Law No 6/1999 of 16 April 1999 on
urgent measures to liberalise markets and strengthen competition
(Spanish Official Gazette No 92, 17.4.1999, p. 14350).

(9) Article 19 of Royal Decree-Law No 6/2000.

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(21) The pool functions as follows: (i) the daily market, which
represents more than 90 % of the total electricity sold in
the wholesale market: there is a single price for each
hourly period, the hourly marginal price; (ii) the intradai-
ly market (around 6 % of total electricity sold in the
wholesale market): energy which is not sold in the daily
market can be sold subsequently in the ‘intradaily
market’. Bilateral contracts represent less than 3 % of
total sales in the wholesale market.

(22) The daily market is a balanced market: energy sold is
equal to energy bought. The remuneration of each seller
is calculated as the product of the energy sold and
the hourly marginal price and, similarly, the payment
obligations of each buyer are calculated as the product
of energy bought and the hourly marginal price. The
daily market is used to make transactions for the next
day by means of the submission of offers for sale or
purchase. These offers are submitted to OMEL, the
market operator, and are included in a matching pro-
cedure for the purposes of the next day’s trading, which
will cover 24 consecutive hourly periods. The market
operator will match the offers for sale and purchase of
electricity using a simple matching method, which
obtains, in an independent manner, the marginal price
and the volume of energy needed from each generating
unit, for purchase in each hourly period. In this way, the
marginal price is obtained for each hourly period
according to the offer made for the sale of electricity by
the holder of the last generating unit which is needed to
feed into the system in order to meet the demand.

(23)

It is therefore necessary to make a distinction, as far as
the liberalised electricity markets in Spain are concerned,
between the electricity offered through the wholesale
market (the pool and bilateral contracts between eligible
customers and generators) and the electricity offered
subsequently by traders to eligible customers (retail
market). However, only the first, the wholesale market,
and in particular the pool (10), and more specifically the
daily market, which accounts for something over 90 %
of electricity sold on the wholesale market, will be
analysed in the present Decision.

(10) Bilateral contracts represent less than 5 % of the total energy sold

B. RELEVANT GEOGRAPHIC MARKET

(24) The relevant geographic market

for the supply of
energy on the liberalised market has been traditionally
considered by the Commission to be no wider than
national borders (11). This has been confirmed, in Spain’s
case, by two recent Commission Decisions (12) and is in
line with the studies carried out by the Spanish compe-
tition authorities (13).

(25)

In particular, imports to the Spanish market are (and
will for some time continue to be) constrained by
the limited interconnection capacity currently available.
According to available information, the commercial
interconnection capacity between Spain and neighbour-
ing countries amounts in theory to approximately
1 900 to 2 000 MW (1 000 to 1 100 with France, 600
to 650 with Portugal and 300 to 350 with Morocco).
This represents approximately 6,6 % of the capacity
needed at peak demand times (14). In addition, overlap
of import and export flows when electricity circulates in
both directions simultaneously only takes place with
Portugal. Exports from Morocco to Spain are very rare
and exports from Spain to France only take place in
rainy seasons (such as in winter 2001); however, the
market study has shown that even when exports between
France and Spain are possible, they do not take place
because the spare capacity related to such flows is not
allocated.

(26) Consequently, the relevant geographic market for whole-

sale electricity is mainland Spain.

(11) Cases IV/M.1659 — Preussen Elektra/EZH, IV/M.1557 — EDF/
Louis Dreyfus, COMP/M.1673 — VEBA/VIAG, COMP/M.1803
— Electrabel/Eon and COMP/M.1853 — EDF/EnBW.

(12) Cases COMP/M.2353 — RWE/Hidroeléctrica del Cantábrico
and COMP/M.2340 — EDP/Cajastur/Caser/Hidroeléctrica del
Cantábrico.

(13) The Spanish authorities consider that, as regards the energy
offered to the pool (wholesale market) under freely competitive
conditions and the demand for that energy, the geographic limits
are the borders of mainland Spain. However, in the case of the
retail market (supplies to final consumers) the Spanish authorities
feel that, although the market could be said to be a national one,
in geographic terms, the relevant geographic market is regional
or even local. Nevertheless, according to the investigations
carried out by the Commission, the retail market in electricity
also appears to be of national dimensions. For the purposes of
this Decision, however, a precise definition of the retail market
for eligible customers is not necessary, since the analysis relates
solely to the wholesale market or pool.

(14) Source: Comisión Nacional de la Energía (National Energy

in the wholesale market.

Commission).

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V. COMPATIBILITY WITH THE COMMON MARKET

INTRODUCTION

(27) The Commission takes the view that the operation can,
for the reasons set out below, strengthen the collective
dominant position currently existing in the wholesale
electricity market in Spain.

(31)

(28) Activity by the notifying parties in the liberalised part
of the Spanish electricity sector is relatively limited.
Hidrocantábrico’s share of sales in the daily market in
the pool was [5 to 10]* % in 2000 and [5 to 7]* %
during the first five months in 2001 (15). In 2000, EnBW
offered only [800 to 1 000]*MW to the pool and Grupo
Villar Mir offered no electricity to the Spanish wholesale
market. Electricity exported by EDF, which jointly
controls EnBW, accounted for around [< 5]* % of sales
in the daily market (including the long-term contract
with REE (Red Eléctrica de España), the operator of the
Spanish grid). In conclusion, the proposed operation
results in relatively limited horizontal overlaps in the
Spanish wholesale market.

(29) However, the proposed operation must be viewed in the
light of the particularly high degree of concentration on
the Spanish electricity market and Spain’s isolation due
to a shortage of interconnections with other systems. It
is also necessary to take into account the special position
of EDF, which as the largest exporter of power to the
Spanish market is, for reasons which will be discussed
below, the main potential competitor of the Spanish
generating companies, while EDF/RTE controls the inter-
connectors and the transmission network through which
all exports of electricity to the Iberian peninsula from
other European countries must be channelled.

(30)

it assumes that

In its reply to the statement of objections, EnBW argues
that
the operator involved in the
proposed merger is EnBW, not EDF. According to
EnBW, the approach taken by the Commission ‘fails to
take into account the fact that EnBW is a full functioning
autonomous company pursuing its own commercial
policy goals ... This is undoubtedly relevant in that
Community rules on the control of mergers explicitly
allow for a company in EnBW’s position to be both a
notifying party and a company affected by the merger ...
The Commission is confining itself to assessing the

(15) The reason for the fall in Hidrocantábrico’s market share in 2001
is that it corresponds to an especially rainy period in which huge
quantities of electricity derived from hydroelectric power were
put on the market. Only 18 % of Hidrocantábrico’s generating
capacity comes from hydroelectric power plants.

merger as though it had been instigated and were to be
executed by EDF ... Consequently, the statement of
objections fails to take account of EnBW’s present
situation and confuses the respective roles of EDF and
EnBW in the merger.’

the nature of EnBW as a full

In the face of these arguments, the Commission must
point out that it did not fail to take account of EnBW’s
role in the operation at any time, notably as regards its
position as a notifying party; nor did it fail to take into
account
functioning
company. It should be borne in mind, however, that,
when assessing the impact of a merger on competition,
the Commission has always taken into account the
activities of all the companies belonging to the same
group (16) (in this case, EDF and its subsidiaries and
divisions, and other companies controlled directly or
indirectly by EDF; and Grupo Villar Mir,
its parent
company and subsidiaries), as all the companies of a
group make up a single economic entity. Furthermore,
in the present case it can be argued that EnBW’s business
strategy is set by EDF, as the Commission has noted in a
previous Decision (17).

A THE WHOLESALE MARKET FOR ELECTRICITY IN SPAIN

1. There is a duopolistic dominant position on the

Spanish market

(a) The two largest Spanish utilities set prices and
collectively dominate the wholesale market

(32) According to the Spanish Competition Court, which
recently looked at the Endesa/Iberdrola (18) and Unión
Eléctrica Fenosa/Hidrocantábrico mergers (19), Spanish
operators enjoy a duopolistic dominant position on the

(16) The Merger Regulation does not define the concept of a group in
the abstract, but sets out to establish whether the companies are
entitled to run the activities of the undertaking (as in the case of
EDF vis-à-vis EnBW).

(17) In its Decision on Case COMP/M.1853 — EDF/EnBW, the
Commission stated that ‘pursuant to the Shareholder Agreement
[between EDF and OEW]* EDF is the sole industrial partner whereas
OEW will be the regional partner. [confidential]* As long as OEW’s
regional interests and its profit interest are sufficiently respected, it
appears very unlikely that OEW has an incentive to actively oppose the
business strategy EDF chooses within EnBW.’
(18) Report C-60/00 on the Endesa/Iberdrola merger.
(19) Report C-54/00 on the Unión Eléctrica Fenosa/Hidroeléctrica del

Cantábrico merger.

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Spanish electricity market. There are two dominant
companies in particular, Endesa and Iberdrola, which
had market shares of 47 and 27 % respectively in 2000
in the daily market. For a large number of hourly
periods, their production is essential to meet demand
and, consequently, they are in a position to set the price.

(33) The findings of

the Spanish authorities have been
confirmed by the results of the Commission’s investi-
gation, which established that the situation described
above has remained essentially unchanged. There have
been no structural changes over the last few months to
substantially modify the duopolistic dominant position

on the Spanish electricity market
Spanish authorities.

identified by the

(34)

In particular, the two main Spanish electricity companies
Endesa and Iberdrola still hold considerable market
installed
power reflected in: 1. their shares of total
electricity generating capacity; 2. their shares of sales to
the wholesale market or pool; and 3. their ability to set
prices in the wholesale electricity market.

(35) As regards, firstly, the total installed electricity generating
capacity of generating companies based in Spain, table 1
shows how Endesa and Iberdrola control around 83 %,
far ahead of the other operators, with 12 % (Unión
Fenosa) and 5 % (Hidrocantábrico).

Table 1

Total installed electricity generating capacity (20)

Endesa

Iberdrola

December 1999

December 2000

May 2001

[ ]* MW [40-50]* %

[ ]* MW [40-50]* %

[ ]* MW [40-50]* %

[ ]* MW [35-40]* %

[ ]* MW [35-40]* %

[ ]* MW [35-40]* %

Unión Fenosa

[ ]* MW [10-15]* %

[ ]* MW [10-15]* %

[ ]* MW [10-15]* %

Hidrocantábrico

[ ]* MW

[< 10]* %

[ ]* MW

[< 10]* %

[ ]* MW

[< 10]* %

Others

[ ]* MW

[< 5]* %

[ ]* MW

[< 5]* %

[ ]* MW

[< 5]* %

Source: Spanish Ministry of Economic Affairs.

(36) Table 2 shows the market shares in respect of sales on
the daily market during the years following those
studied in the abovementioned reports by the Spanish
Competition Court. Again, the combined share of Endesa
and Iberdrola is between 74 % and 78 % of the total.

(20) The table does not include installed capacity under the special
scheme, which amounted to 8 695 MW at 31 December 2000.

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Table 2

Sales on the daily market

Endesa

Iberdrola

Unión Fenosa

Hidrocantábrico

Others

Imports / EDF-REE (Red Eléctrica
de España) contract

1999

[45-50]*

[25-30]*

[10-15]*

[5-10]*

[< 5]*

[5-10]*

Source: OMEL, the Spanish company operating the Spanish electricity market.

2000

2001 (Jan-May)

(%)

[45-50]*

[25-30]*

[10-15]*

[5-10]*

[< 5]*

[< 5]*

[40-45]*

[30-35]*

[10-15]*

[5-10]*

[< 5]*

[< 5]*

(37) The market power of the two main operators in the
Spanish electricity market is particularly highlighted by

their ability to set prices in the wholesale market. The
table below illustrates this.

Price-setting capabilities of market operators in relation to the quantities of energy sold (21)

Table 3

Year

Endesa

Iberdrola

Endesa/
Iberdrola

Endesa/
others

Iberdrola/
others

1998

1999

2000

2001

Source: OMEL.

55-60

20-25

45-50

25-30

40-45

25-30

40-45

20-25

0-2

0-2

0-2

0-2

0-2

0-2

0-2

0-2

0-2

0-2

0-2

0-2

Endesa/
Iberdrola/
others

0-2

0-2

0-2

0-2

(%)

Others

15-20

20-25

25-30

35-40

(38) The marginal price-setting capabilities of Endesa and
Iberdrola in the wholesale market are not due solely
to the size of their installed generating capacity in

(21) The table shows what percentage of electricity, in relation to the
total amount of electricity placed on the market, has been sold
at the marginal price corresponding to that offered by each
operator or simultaneously by two or more operators.

comparison with total
installed capacity in Spain.
Account must also be taken of the technological compo-
sition of their installed capacity, or generation mix. As
the Spanish Competition Court has emphasised:
‘the
setting of offer prices in the pool for the various hourly
periods is in large measure determined by the different
generation technologies used by the generating plants
which make up the system. In general, and as a result of

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the different production tech-
the characteristics of
nologies, coal plants tend to set prices mainly during
troughs in demand, while hydroelectric plants tend to
dominate during peak periods. Consequently, given that
Endesa generates about 57 % of its energy using coal,
and Iberdrola is clearly the leading company in flexible
hydroelectric generation, both groups are accustomed
to leading marginal price setting in the market’ (22).

(39)

Endesa and Iberdrola play a pivotal role in the Spanish
wholesale market. Their capacity is at least equal to the
excess supply on the market, especially at times of peak
demand. This means that the combined supply of the
rest of the generators is insufficient to satisfy demand
and the pivotal firms can increase their prices in response
to demand, generally without fear of losing business.

(40) Moreover, there are various links between the companies
operating in the electricity market. These are both legal
(jointly owned plants such as Trillo, stakes held in
market operators and in the system) and structural. In
particular, various structural characteristics of the market
allow strategic coordination between operators, such as
the fact that the market is in one homogeneous and
relatively transparent product in which price fluctuations
are detected almost immediately.

(41)

Finally, besides the considerations set out above regard-
ing the market power of the two main Spanish operators,
account has to be taken of the fact that the Spanish
generating market may be viewed as a market with little
accessibility, given the existence of a number of barriers
to entry, such as: 1. access to potential production sites
and hydroelectric and fuel resources; 2. installation costs;
3. the necessary diversification of the generation mix;
and especially 4.
interconnection
capacity with France, on which exports to the Spanish
market
from other European countries outside the
Iberian peninsula have to rely.

the shortage of

(22) Report C-54/00 on the Unión Eléctrica Fenosa/Hidroeléctrica del

Cantábrico merger.

(b) Smaller Spanish generators and foreign oper-
ators, considered as a group, have not been in
a position to set prices for most hourly periods

(42) The other Spanish generators, Unión Fenosa and Hidro-
cantábrico, have, for most hourly periods, taken the
prices set by the dominant firms. As indicated above (see
table 3), one of the two main Spanish operators, either
Endesa or Iberdrola, has been able to set prices in some
60 to 80 % of cases. Given that quantities offered above
the marginal price are not sold in the daily market, the
other operators, knowing that Endesa’s and Iberdrola’s
offers are necessary to meet demand in almost every
hourly period, tend to submit zero price offers, safe in
the knowledge that all the electricity they offer will be
sold in the daily market at the marginal price set in the
pool
the price at which it was offered).
Accordingly, the two largest players are able to use their
broad generation mix in such a way as to enable them
to submit flexible offers according to expected supply
and demand. Smaller players, like Unión Fenosa and
Hidrocantábrico, which have a narrow generation mix,
are less able to submit competitive offers which are
sufficiently flexible. For them, the option of offering at
zero price, knowing that Endesa and Iberdrola will ask
for high prices, is the easiest way to make as many sales
as possible.

(and not

Moreover, on account of its long-term contract with
EDF, REE offers electricity to the pool at prices which
are public knowledge. This means that during the trough
hours in which Endesa and Iberdrola’s supplies may not
be needed to cover all the demand, if the REE offer is
needed the rest of the Spanish operators are sure that
they will receive the price offered by REE. This price
(around EUR [< 0,05]* per kW/h) is currently between
30 % and 40 % higher than the average prices offered by
EDF to eligible customers in the French market.

(c) Despite the existing collective dominance, the
price level on the Spanish market has been
affected by increases in the amount of cheap
energy supplied in the pool

(43) Between November 2000 and March 2001, exception-
ally heavy precipitation significantly boosted the amount
of power generated by hydroelectric plants. Average
prices in Spain plummeted (falling 30 to 40 % by
comparison with average prices over the same period in
2000). However, prices quickly returned to their earlier
level after this period of heavy rain.

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(44) This drop in prices might have indicated that the joint
dominant position is being weakened. However, the
results of the market study conducted by the Com-
mission show that this situation is purely short term and
will not significantly change the duopolistic structure of
the relevant market, the degree of market power wielded
by its two main operators or the comfortable situation
of the small operators as price takers.

(45)

It should be borne in mind that one of the major
operators, Iberdrola, produced the lion’s share of the
electricity generated during this period, supplying elec-
tricity generated at
in its hydroelectric
low cost
plants (23). The second operator with a high hydroelectric
output is Endesa (24). It is worth pointing out here that,
according to the Spanish authorities and a number of
third-party competitors, many of these hydroelectric
power stations had to be used to generate electricity in
order to take pressure off the reservoirs and thus make
room to take up flood water. As prices are generally set
with a narrow margin, at the point of intersection of
supply and demand, the two main operators, which
were forced to take the decision to offer large quantities
of energy at zero price in order to be sure of selling it,
were less successful in fine-tuning their offers in order
to maintain a high price level. However, once they were
relieved of the obligation to dispose of large quantities
of hydroelectric power, they were once again in a better
position to mix electricity of this type with that generated
at a higher cost. Prices have therefore risen back to their
former level.

(46) However, as noted above, the situation described is
entirely short term, as it is the result of a period of
exceptionally high precipitation. Hydroelectric output
between May 2000 and June 2001 reached an all-time
high, as it was 64 % up on output over the 12 previous
months. According to the calculations of the Spanish
authorities, the probability of matching or exceeding
this hydroelectric output is no more than 7 %. There can
be no doubt that this is an atypical, one-off situation
which cannot be interpreted as the outcome of a
structural change in the Spanish electricity market
substantially affecting the position of joint dominance
exercised by the two main generators.

(47) At all events, the impact which low-cost electricity had
on pool prices during the period in question indicates
that, as a general rule, supplying a relatively large
amount of cheap electricity brings down average prices.

(23) Hydroelectric power accounts for approximately 50 % of Iberdro-

la’s generating capacity.

(24) Hydroelectric power accounts for about 36 % of Endesa’s

generating capacity.

Since imported energy competes in the pool on the
same basis as energy generated by the system, as
explained below,
it may be concluded that a rise in
imports of low-cost electricity on the Spanish market
would go hand-in-hand with a comparable drop in price
levels,
in that it would displace higher offers in the
formation of the marginal price. This would apply
particularly at times of low and medium demand, if the
increase in imports were to result in a situation in which
the supply from Endesa and Iberdrola were not essential
to satisfy demand. The same goes, moreover, for the
additional power offered to the Spanish market through
bilateral contracts. This would certainly boost compe-
tition on the Spanish market and weaken the existing
position of joint dominance.

(48) The surplus capacity and technology mix of some
operators (especially EDF, with its surplus nuclear energy
production), together with the price differential between
Spain and other European countries, favours compe-
tition from low-price suppliers. However, the limitations
resulting from the existing interconnection capacity
form a significant entry barrier to the Spanish market,
thus tending to maintain and consolidate the status quo,
as explained below.

2. The (extremely) limited import capacity freely
available via the French-Spanish interconnector
has boosted the Spanish generators’ collective
dominant position

(a) The current state of play as regards intercon-

nection between France and Spain

(49) The Iberian peninsula’s electricity grid is linked through
interconnectors to the French national grid, at the border
between the two countries. The installed capacity which
can, in theory, be used for commercial purposes, totals
a maximum of 1 100 MW for flows from France to
Spain and 1 000 MW in the opposite direction (25).

(25) For reasons to do with the safety of the electrical system in
particular, the ‘commercial capacity’ is the only part of the total
physical capacity which is really useful
for exchanges. The
commercial capacity between systems is not the sum of the
transmission capacities associated with the different components
of the grid (lines) which make up the interconnection:
it is
significantly lower, as the operation of
the interconnected
electrical systems requires operating conditions and safety mar-
gins to be taken into account. The system operator establishes
the available commercial capacity for different periods of time,
ranging from a year, through a fortnight to a day, determining
with great precision what resources can be used, depending
on the availability and operating schedules of the system’s
components.

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Table 4

Interconnection capacity between France and Spain

Interconnection with the European grid

Total physical capacity

Commercial capacity

One 400 kW line from Hernani to Cantegrit

One 400 kW line from Vic to Baixas

3 826 MW (winter)

1 100 MW (winter)

One 220 kW line from Arkale to Monguerre

3 194 MW (summer)

1 000 MW (summer)

One 220 kW line from Biescas to Pragnere

Source: Spanish Ministry of Economic Affairs.

(50) This interconnection capacity represents about 3,5 % of
the capacity needed to satisfy peak demand in Spain. It
should, however, be borne in mind that the figures cited
refer not to ‘real’ commercial capacity (i.e. that which is
actually usable) but to ‘anticipated’ commercial capacity:
for example, in July and August 2000, the ‘real’ commer-
cial interconnection capacity between France and Spain
was approximately 800 to 900 MW, and only 400 to
700 MW in the opposite direction (26). Moreover, the
guaranteed maximum interconnection capacity is only
550 MW in both directions (27). Finally, it should be
noted that available commercial capacity is calculated
independently by the operators of the two systems and
that the lowest value of the two is used.

(51) The inadequacy of the interconnection with France,
which isolates the Spanish electricity market, is clearly
demonstrated by the capacity ratios (29) and the intercon-
nection capacity in relation to demand at peak times,
which are less than 5 % and 6,6 % respectively for Spain.
It may thus be concluded that imports are extremely
limited as a result of this restricted commercial intercon-
nection capacity. A comparison between the installed
interconnection capacities of other European countries
reveals that Spain has the lowest value as a percentage
of the capacity needed at peak demand times.

Table 6

Interconnection capacities in relation to peak demand

Table 5

Commercial
interconnection capacity between France
and Spain: ranges most frequently published in 2000 and
2001 (28)

Direction

Peak

Trough

France >>>>>>Spain

750-1 100 MW 800-1 100 MW

Spain >>>>>>> France

400-700 MW 700-1 000 MW

Source: Spanish Ministry of Economic Affairs.

(26) Source: Red Eléctrica de España, the operator of the Spanish grid.
(27) This means that whatever happens to the system, the commercial

interconnection capacity will never fall below 550 MW.

(28) The limits to commercial capacity derive from structural limi-
tations on the transmission grid in the border area, while the
variation in commercial capacity values is mainly the result of
changes in the seasonal thermal capacity of the electricity lines
(summer to winter). Another factor which affects both aspects is
the structure of electricity generation in different periods and the
demand values in areas near the border which can, in some cases,
saturate domestic grids.

Country

(%)

Interconnection
capacity/
peak demand

129,6

75,3

30,8

28,7

17,6

16,6

15,1

13,7

11

6,6

Switzerland

Austria

Belgium

Netherlands

Greece

France

Germany

Portugal

Italy

Spain

Source: Spanish National Energy Commission.

(29) Capacity ratio = theoretical

international

interconnection

capacity/installed capacity (excluding special scheme).

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(52) On the basis of the figures supplied, the EU average

clearly lies between 15 and 20 %.

(53) Returning to the Spanish case, between 80 and 90 % of
imports come from the French-Spanish interconnectors
(which account for approximately 60 % of Spain’s
total anticipated commercial interconnection capacity).
Moreover, [40 to 60]* % of the anticipated commercial
interconnection capacity between France and Spain is
reserved for the contract between EDF and REE. This
contract, which was enshrined in the ninth transitional
provision of Spanish Law No 54/1997 of 27 November
1997 on the electricity sector (30), provides for the

(54)

supply of electricity over a 20-year period, approxi-
mately 10 years of which have passed. The aim of this
contract was to guarantee REE’s electricity supplies in
Spain. Taking account of this contract, the intercon-
nector has a permanent capacity reserve of [500 to
600]* MW, which is equivalent to [80 to 100]* % of
the total guaranteed commercial capacity. In addition,
electricity is supplied to the pool at prices which are
known to the other competitors.

it

is important

Finally,
the degree of
saturation of this interconnector has recently exceeded
90 %, which means that the interconnector was used
almost exclusively for electricity imported into Spain.

to note that

Table 7

Degree of use of the commercial exchange capacity

Imports

Half-year

Mean use

Mean
capacity

Utilisation
rate (%)

Mean
capacity

1999 — January-June

731,6

619,2

84,64

532,1

1999 — July-December

927,6

874,4

94,27

654,5

2000 — January-June

949,4

922,2

97,14

708,0

Exports

Mean use

(in MW)

Utilisation
rate (%)

0,0

0,0

7,9

0,00

0,00

1,11

2000 — July-December

965,9

888,4

91,97

702,6

12,9

1,84

2001 — January-May

1 051,9

625,6

59,47

737,6

269,2

36,49

Source: OMEL.

(55) According to data supplied by the Spanish competition
authorities, EDF has habitually used [200 to 300]* MW
of interconnector capacity over and above its long-term
contract with REE. EDF thus uses approximately [70 to
80]* % of the total anticipated commercial intercon-
nection capacity.

they work properly, decided to boost interconnection
capacity between France and Spain significantly. Signifi-
cant progress had been made with the planning of these
projects by 1996, so that all the permits necessary to
start carrying them out were obtained.

(b) Prospects

for
capacity in the near future

increased

interconnection

(56)

In early 1990, EDF, which owns the French grid and
interconnectors and is responsible for ensuring that

(30) Spanish Official Gazette No 285, 28.11.1997, p. 35097.

(57) The projected Aragon-Cazaril line, which is a result of
these contacts, would provide a guaranteed commercial
capacity of approximately 1 100 MW, and implemen-
tation of the plan would have brought the total antici-
pated commercial capacity to some 2 300 MW. How-
ever, in 1996 the French Government decided to call a
halt to all progress on these projects on social (local
opposition)
areas)
environmental
grounds and EDF had to compensate the operator of the
Spanish grid, REE.

(protected

and

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(58)

In 1997 a new agreement was signed. The Parties
concerned committed themselves to increasing commer-
cial
interconnection capacity across the Pyrenees by
2006, preferably using the Aragon-Cazaril line, which
was to come into operation by 2006. Under the terms
of the contract, the Parties were liable and were required
to pay compensation if the increase in interconnections
was delayed until after 1 January 1997 (for reasons for
which they bore some responsibility, of course). If the
necessary permits could not be obtained (that is, for
reasons outside their responsibility), the Parties would
not be liable. However, provision was to be made
for alternative lines to reinforce and upgrade existing
failure to make
capacity.
provision for liability (in the event that the relevant legal
permits are not obtained) does not in any way imply a
lack of economic incentives on EDF’s part. The agree-
ment was signed by the French generator (as proven by
documents in the Commission’s possession), so it is a
reliable commitment.

It should be noted that

(59) As both RTE and REE recognise the need to increase
interconnection between France and Spain, they have
agreed to improve the Hernani-Cantegrit line. REE is
improving the Vic interconnector on the Vic-Baixas line.
It is hoped that as a result of these operations, according
to information provided by the Spanish grid operator,
interconnection capacity
the anticipated commercial
between Spain and France will have increased by around
500 MW by mid-2002, thus bringing total anticipated
capacity up to 1 600 MW. Consequently, according to
the commitments entered into by EDF/RTE in the
1997 agreement (creation of the Aragon-Cazaril line or
another 1 200 MW alternative),
interconnection
capacity should reach at least 2 800 MW by 2006.

(60) Recently REE and EDF-RTE submitted to their respective
governments a joint study on possible routes, in which
they examined the relevant environmental and economic
issues. The final decision awaits approval by the two
authorities. In principle, EDF appears to be reluctant to
accept the line crossing the central Pyrenees (Aragon-
Cazaril): it would prefer a route through the eastern
Pyrenees (the route taken by the high-speed train). This
option is different from the solution initially negotiated,
Aragon-Cazaril.

(61) The exploration of alternative routes by both grid
operators merely serves to confirm a fact to which we
will refer below: EDF has economic reasons for increas-
ing the interconnection capacity between France and

Spain substantially. The aim in searching for new routes
is precisely to avoid a repetition of what happened in
1996. The players involved have merely anticipated
possible difficulties (social or environmental), trying to
find solutions which will ensure that the projected
increase in interconnection capacity is genuinely viable.

(c) There is too little freely available existing
capacity to have a significant influence on the
Spanish wholesale market

(62) Given the long-term contract between EDF and REE,
which takes up most of the French-Spanish intercon-
nection capacity, the remaining capacity theoretically
available to importers amounts to some [500 to
600]* MW, that is, approximately [1,5 to 2,5]* % of the
capacity necessary to satisfy Spanish demand during
peak hours.

(63) The foreign competitors which export electricity into
Spain face significant barriers to entry. A very small
amount of electricity is imported by companies other
than EDF (approximately 25 %, most of which is
accounted for by Electrabel). Moreover, [5 to 10]* % of
total French exports went to the traditional Spanish
operators, rather than the pool or independent foreign
operators. This means that not all sales of electricity in
Spain competed with supplies from the major operators.

(64) The isolation resulting from the limited interconnection
capacity is a key factor in the joint dominant position
held by the two main market operators, as the Spanish
authorities stressed during the inquiry.

(d) The current electricity deficit in the south and
east of Spain is not such that the grid would
collapse if there were an increase in intercon-
nection capacity between France and Spain
over the next few years

(65) Moreover, EnBW claims that, in view of the current
electricity deficit in the south and east of Spain, which
obliges REE to have recourse to less efficient power
stations to prevent the grid from collapsing, a substantial
additional supply in the north, through an increase in
transport capacity from France, could aggravate the
present situation in view of the current state of the grid
and REE’s difficulties in reaching areas with unsatisfied
demand.

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(66) However, it must be borne in mind that many of the
projects to establish new generating capacity, to which
EnBW itself refers in its comments, will be sited in the
south and east of Spain (31); consequently, it is rather
doubtful whether an increase in interconnection capacity
could lead to a collapse in the grid. It should also be
borne in mind that some of
the main centres of
electricity consumption in Spain are situated in the
north of the country.

B.

STRENGTHENING OF THE EXISTING DOMINANT POS-
ITION ON THE SPANISH MARKET

(67) As detailed below,

following expansion of

the Commission takes the view
that the notified operation will result in the existing
duopolistic dominant position on the wholesale elec-
tricity market in Spain being strengthened. In particular,
as a result of the merger there will no longer be the
incentives that existed beforehand for EDF to increase
substantially its exports of electricity to the Spanish
the interconnection
market
capacity between France and Spain. This will both
eliminate the existing Spanish generating companies’
main potential independent competitor and maintain
the isolation of the Spanish electricity market from
other European electrical systems outside the Iberian
peninsula.
it will have the effect of
consolidating the existing joint dominant position on
the Spanish electricity market, which will be protected
from potential competition from operators based in
other European countries outside the Iberian peninsula
by an entry barrier: limited international interconnection
capacity, without any real prospects for significant
further development.

In both cases,

(68)

In their responses to the statement of objections, EnBW
and Grupo Villar Mir claim that under the Merger
Regulation a merger cannot be declared incompatible
with the common market if it strengthens a collective
dominant position held by third parties other than those
affected by the merger, an argument in support of which
they adduce a number of judgments issued by the
Community courts and decisions taken by the Com-
mission itself (32).

(31) The new plants in San Roque, Castellón, Escombreras, etc.
(32) Grupo Villar Mir, for example, argues that in all the cases in
which the Commission or the Community courts have accepted
the creation of a collective dominant position as a valid criterion
for banning a merger, the notifying parties were part of the
oligopoly or duopoly in a dominant position (Gencor/Lonrho,
Nestlé/Perrier, Kali & Salz) and that although the Commission
has decided in previous cases that a merger creates competition
problems in that it reduces the number of operators competing
on the market (Nestlé/Perrier), the position of third parties in the
market is never the criterion which leads to the banning of a
notified operation. EnBW argues that Articles 8(3) and 2(3) of
the Merger Regulation imply that the ban must not be applied to
mergers which allegedly reinforce the collective dominant pos-
ition of third parties other than the Parties affected by the merger.

(69) However, as the Parties note in their claims, there is a
precedent in the Commission’s Decision in the Exxon/
Mobil case (33), which relates to the strengthening of a
dominant position held by undertakings other than the
Parties involved in the merger analysed. However, the
Parties allege that
in this case there were various
structural links between the company affected by the
merger and the company in a dominant position, whilst,
according to EnBW, Hidrocantábrico has no structural
or other links with members of the duopoly in the
notified merger.

(70) However, the inquiry, and in particular the information
provided by the Spanish ministerial authorities, has
revealed that, in the present case, there are also various
structural links between the notifying parties (and EDF,
as a company which exercises joint control over one of
them) and the members of the duopoly in question.
These links are as follows:

— joint ownership of power stations, such as Trillo,

— ownership of Elcogas SA, [3 to 5]* % of whose
equity is held by Hidrocantábrico, 37,93 % by
Endesa and 11,10 % by Iberdrola. EDF has a [25 to
30]* % stake,

— the four major Spanish generators are OMEL
shareholders, each of them accounting for 5,71 %
of its equity,

— the four major Spanish generators are REE share-
holders, each of them accounting for 10 % of its
equity.

(71)

Finally, independently of the above remarks and contrary
to what the Parties claim, if the merger involves strength-
ening the dominant position of third parties which are
not party to the merger, it is not essential for those third
links with the
parties to have significant structural
notifying companies. The Parties infer that there is such
a requirement from the Exxon/Mobil Decision referred
to above. However, what the principle referred to in that
Decision actually says is that the strengthening of a
dominant position in which the Parties to the concen-
tration are not involved does fall within the scope of the
Merger Regulation without any further qualification (34).

(33) Case IV/M.1383 — Exxon/Mobil.
(34) Recital 225 of the Decision and recital 228, which reads as
follows: ‘The Commission considers that the creation or reinforcement
of a dominant position by a third party is not excluded from the scope
of application of Article 2(3) of the Merger Regulation. In addition, it
should be borne in mind that Gasunie [the third party occupying a
dominant position]* is a JV in which one of the Parties to the
concentration has a substantial interest’ (emphasis added).

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Article 2(3) of the Merger Regulation reads as follows: ‘A
concentration which creates or strengthens a dominant
position as a result of which effective competition would
be significantly impeded in the common market or in a
substantial part of it shall be declared incompatible with
the common market’. This provision lays down a causal
link between the merger in question and the (creation
or) strengthening of a dominant position. Nothing in
the wording of this provision entails the conclusion that
the notifying parties necessarily need to form part of the
dominant position themselves or to have substantial or
significant links with the third parties that do. The
Commission therefore concludes that the wording of
the provision means that mergers which are capable of
strengthening a dominant position and constitute an
obstacle to effective competition are incompatible with
the single market, regardless of whether the dominant
position is held by the companies involved in the
merger, by companies structurally linked to them or by
third companies.

(72)

Finally, EnBW claims that in Spanish and European
competition law there are alternatives to Community
monitoring of merger operations for counteracting
potential abuses by members of a duopoly. However, as
the Commission has had occasion to point out in the
past (35), the Merger Regulation lays down a system of
structural supervision intended to prevent the creation
or strengthening of dominant positions rather than a
system for keeping tabs on potential abuses.

has grown considerably over the last few years, the
average rate of increase being between 5 and 7 %. The
creation of new generating capacity has not kept pace
with this rise in demand. Moreover, the investigation
has shown that demand will continue to increase at over
3 % for the next few years (36).

(75) The law currently in force in Spain allows foreign
suppliers to sell electricity directly to the pool or,
alternatively, to eligible customers or power generation
or distribution companies. In particular, the pool system
in its existing form allows interested operators to
develop sales in Spain without first having to acquire
generating capacity in the country.

(76) The market study conducted by the Commission’s
departments clearly demonstrates that operators based
on the other side of the Pyrenees have incentives to enter
the Spanish market. The study also shows that, despite
the existence of such incentives, operators face difficult-
ies due to the paucity of
interconnection capacity
between Spain and its neighbours, particularly France,
an aspect which is analysed below. At all events, suffice
it to say here, as an indicator of operators’ incentives
and the difficulties arising from the shortage of intercon-
nection capacity, that the daily demand by European
electricity companies based outside the Iberian peninsula
for the allocation of interconnection capacity with Spain
is seven times greater than the physical interconnection
capacity currently available.

1. There are incentives for companies based in other
Member States to enter the Spanish wholesale
market

2. EDF is the Spanish electricity generating compani-

es’ main potential competitor

(73) As noted above, the wholesale electricity market in
Spain offers attractive prices to operators based in other
countries. The price level applied to eligible customers is
generally over 30 % higher than in other European
countries such as France and Germany.

(74)

It should also be noted that Spain has traditionally been
a net importer of electricity. There are various reasons
for this: firstly, the installed production capacity and the
particular mix of electricity production sources in Spain
(the generation mix). Secondly, the demand for electricity

(77)

EDF, in its present role as a foreign operator, is the
Spanish electricity generating companies’ main potential
competitor. Firstly, it has extensive generating capacity
with low variable costs in France, largely owing to its
capacity to generate nuclear power. EDF is in a position
to supply power to the Spanish wholesale market during
periods of average and low demand. This type of
generating capacity is particularly appropriate when a
continuous long-term supply is required. Moreover, EDF
has very extensive financial resources at its disposal,
enabling it to compete on electricity markets beyond its
domestic market without needing to establish a presence
there.

(35) See the Exxon/Mobil Decision referred to above.

(36) The Spanish National Energy Commission forecasts that energy
consumption in Spain will grow by over 12 % between 2001 and
2005.

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(78) Over the last few years EDF has developed a policy of
exporting electricity to other European countries. In this
context it should also be borne in mind that France
holds a strategic position on the liberalised European
market, owing to its interconnections with the United
Kingdom, Belgium, Germany, Switzerland and Italy. Any
other generating company established in one of the
countries mentioned or beyond their borders and wish-
ing to export electricity to Spain has to do so through
the French transmission grid and interconnectors, which
puts them at a disadvantage in strategic terms.

(81)

3. Prior to the proposed merger, there were clear
incentives for EDF to increase its exports to Spain
and to favour increased interconnection capacity
to this end

EDF’s past behaviour is indicative of its desire to increase
its presence on the Spanish market. The investigation
has shown that
the French undertaking has given
unmistakable signs of its wish to increase the capacity
of the interconnection between France and Spain with a
view to enabling it more easily to step up its exports to
the Iberian peninsula. It should not be overlooked that
the initial Aragon-Cazaril agreement
the signing of
shows that EDF had included among its strategic objec-
tives the plan to build a third interconnector at the
French/Spanish border which could increase intercon-
nection capacity by 1 200 MW. EDF has also contributed
considerable human and financial resources to the
project at each stage of its development (planning,
engineering, licensing procedures) for nearly a decade.
The blocking of the project in 1996 does not mean that
EDF had no economic interest in substantially increasing
interconnection capacity with Spain. The features of the
Spanish market and of EDF itself, as well as its position
on the French market, were favourable to that interest.
The reasons for the blocking, which have already been
stated, had nothing to do with the French producer’s
incentives, but with certain factors unconnected with it
which led the French government to stop the project.
Last but not least, the signing of a new agreement in
1997 confirmed EDF’s desire to bring about a large
increase in interconnection between France and Spain
and, in so doing, to boost its position on the Spanish
market by significantly increasing its exports. Further-
more, EDF-RTE has undertaken to upgrade the Hernani-
Cantegrit line by 300 MW and, in conjunction with REE,
is looking into the feasibility of a further increase of
1 200 MW. All this, together with the upgrading of the
Vic interconnector in Spain, which is being undertaken
by REE (involving a further 200 MW), could (with the
appropriate political and economic stimulus) lead to
total interconnection capacity of somewhere between
3 800 and 4 000 MW by 2007. The market study
carried out by the Commission has also shown that REE
is highly interested in increasing the commercial capacity
of French-Spanish interconnection to at least 6 000 MW.

(82)

Previous recitals have underlined the incentives for
operators not established in Spain to export electricity
to the Spanish market. It has also been seen how EDF is
in a particularly privileged position which makes it, as a
foreign operator exporting to Spain, the main potential
competitor of the Spanish electricity generators.

(79)

EDF’s current sales of electricity account for approxi-
mately [< 5]* % of total sales in the Spanish pool
(including the long-term contract between EDF and REE),
whilst the total number of imports and international
transactions represent around 5 % of total sales on the
wholesale market. As stressed above, the fact that EDF
has traditionally played a key role in interconnection
capacity at the French/Spanish border has contributed
decisively to this level of sales. This has helped to ensure
a constant flow of electricity at a constant price.

(80)

Finally,
it should be noted that that EDF enjoys the
considerable advantage that its domestic market is close
to Spain. EDF has a near-monopoly of generating
capacity in France. It is almost impossible for foreign
competitors to buy electricity from EDF on the French
market. They are thus obliged to purchase electricity in
other countries and effect the necessary transactions to
ensure its transmission via the French national grid to
the French/Spanish border. According to the replies
given by competitors in the context of the investigation
conducted by the Commission’s departments, there seem
to be regular connection problems in the south of
France, which is why RTE often requires grid users to
pay congestion fees or surcharges. Foreign suppliers
therefore have to take these costs into account when
making offers, which is particularly complex when
supply contracts are concluded several months in
advance. This diminishes the economic viability of such
operators’ electricity exports. EDF, on the other hand, is
in a more favourable position, as it has a comparative
advantage in terms of access to information and having
its own production system, enabling it to avoid or
minimise congestion surcharges and thus to make
cheaper offers which can be anticipated further in
advance.

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Official Journal of the European Union

L 48/101

(83) As explained below, not only does EDF have the
necessary potential for increasing its exports to Spain,
even without the proposed merger it also has powerful
incentives for effectively increasing its exports and
thereby strengthening its position on the Spanish
market.

process began, the incentives justifying EDF’s strategy of
expanding its activities in Spain as an electricity exporter
have not only not diminished but have increased, as
stressed in the foregoing.

(84)

First, electricity prices are higher in Spain than in France,
and EDF has surplus generating capacity. A comparison
of price levels in Spain and France in recent years shows
that prices charged to eligible consumers in Spain are
usually over 30 % higher, on average, than those applied
in France. Only during exceptionally rainy periods, such
as in the early months of 2001, do prices in Spain fall to
levels close to those prevailing on the French market.
Taking EDF’s surplus generating capacity also into
account, it would clearly be in its interest substantially
to increase its electricity exports to the Spanish market.

(85)

Second, EDF’s pan-European strategy requires it to be
able to supply international customers established in
Spain. In its Decision in EDF/EnBW (37), the Commission
already referred to the strategy developed by EDF in
recent years, which places it in a unique position to
offer genuinely pan-European supplies to industrial and
commercial consumers. That strategy relies, among
other things, on building up EDF’s position on the
Spanish market.

(86) Given the limited amount of interconnection capacity
currently available between France and Spain,
that
capacity clearly has to expand before EDF can signifi-
cantly increase its exports to the Spanish market. Even
under the existing capacity allocation system, which
allows EDF to use most of the available commercial
capacity (around [70 to 80]* %), EDF cannot achieve a
significant presence on the Spanish market as a foreign
exporting operator without a large increase in intercon-
nection capacity between France and Spain.

(87) As noted earlier, EDF has in the past given signs of its
desire to increase interconnection capacity between the
two countries, not only by supporting the upgrading of
existing interconnectors but also by including the Ara-
gon-Cazaril project among its strategic priorities. Fur-
thermore, although initial work on that project was
carried out before the electricity market liberalisation

4. A substantial increase in exports to Spain, once
interconnection capacity has been expanded, would
give rise to greater competition in the Spanish
electricity market, thereby weakening the existing
jointly dominant position

(88)

In view of the present difficulties involved in building
new generating capacity in Spain to offer an alternative
to the capacity controlled by the four main Spanish
generating companies (38), the main route for boosting
competition on Spain’s oligopolistic electricity market is
to increase substantially the volume of electricity exports
from other European countries to the Spanish market.

(89) The above finding is in line with the outcome of the
analysis carried out by the Spanish Competition Court
in its assessment of the Unión Eléctrica Fenosa/Hidroe-
léctrica del Cantábrico merger: ‘the electricity generating
system relies on the possibility of offering electricity to
the pool under conditions of free competition. Suppliers
can make their offers with electricity from generating
plant located in Spain or with electricity imported from
foreign systems. Imported electricity competes in the
pool on an equal footing with energy generated within
the national system. To sum up, competition with
operators already present in the Spanish system could
come not only from new generators but also from
importers. This route would also enable the introduction
of competition to be speeded up, since it would not be
necessary to wait for several years as in the case of new
power stations’ (39) (emphasis added). From the findings
of the Spanish Competition Court it may, therefore, be
concluded that exports of electricity to the Spanish
market are a particularly well-suited instrument, when

(37) Case COMP/M.1853 — EDF/EnBW.

Cantábrico merger.

(38) Report C-60/00 on the Endesa/Iberdrola merger.

Report C-54/00 on the Unión Eléctrica Fenosa/Hidroeléctrica del
Cantábrico merger.

(39) Report C-54/00 on the Unión Eléctrica Fenosa/Hidroeléctrica del

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18.2.2004

increasing levels of competition in that market. This
tells against the notifying parties’ assertions that the
statement of objections made too much of the role to be
played by exports, in particular those from EDF.

(90) At present, however, the limitations stemming from the
shortage of existing interconnection capacity between
Spain and other European countries outside the Iberian
peninsula prevent exports to the Spanish market playing
an active role in promoting competition on the Spanish
total
In particular,
electricity market.
electricity demand in Spain which is met by imports
across the French/Spanish border stands at somewhere
between 3,5 % and 4 % (around 8 000 GWh). But this
could change in future given the strategic interest of EDF
and other European operators in substantially increasing
exports to Spain.

the share of

(91) A relatively large increase in electricity exports to Spain
would indeed have notable effects both on the level of
prices charged on the Spanish wholesale market and on
the existing oligopolistic status quo on that market.
Foreign operators would thus gain readier entry to the
organised market and easier access to direct bilateral
contracts, while the supply of electricity on the Spanish
market would be increased. All this would reduce the
isolation of
thereby
imparting considerable impetus to competitive forces
on that market and pushing electricity prices down.

the Spanish electricity market,

(92)

Such an increase in supply on the wholesale market
would lead not only to a reduction in the relative market
shares of the two main Spanish operators but also, and
more importantly, to a weakening of their respective
power to set prices in the pool. Provided that exports
to the Spanish wholesale market consist of low-cost
electricity (for example electricity generated by nuclear
power stations in France), those exports would displace
offers of more expensive electricity in the formation of
the marginal price,
thereby introducing competitive
forces into the market. The situation described, in which
sales by foreign operators contribute to a lowering of
prices, either directly (setting the marginal price) or
indirectly (forcing the main operators to offer electricity
at lower prices), would of course take place to a greater
extent the greater the volume of exports to the Spanish
market.

result of the increase in hydroelectric power generation,
illustrates the effects of an increase in the amount of
low-priced energy offered in the pool. The sharp increase
in hydroelectric power generation observed in Spain
between November 2000 and March 2001 led to a
significant drop in the price of electricity, by up to
42 % (40). Taking a longer period as a reference basis, if
consecutive months
13
equivalent
(March
2000/
and March
2000
March 2001) are examined, an increase in the supply of
hydroelectricity of 22 811 GW/h caused electricity
prices to fall by a little over 30 % over the time periods
observed.

periods
1999/March

of

(94) The abovementioned increase in the supply of electricity
is quantitatively and qualitatively comparable to that
which would result from a substantial increase in the
interconnection capacity between France and Spain.
Firstly, given that with current capacity (1 100 MW)
exports from France total 8 TW/h, an extra 3 000 MW,
i.e. a situation in which there would be a total of
interconnection capacity,
4 000 MW of commercial
would lead to an increase in supply of some 20 to
24 TW/h per year. Secondly, from a qualitative stand-
point, the energy exported to Spain could be expected
to be electricity generated by plants with low marginal
costs, which could therefore be supplied to the Spanish
wholesale market at lower prices than those traditionally
prevailing on that market.

(95) Recent developments observed on the Spanish market,
and in particular the parallel with the increase in
hydroelectric power production, make it possible to
conclude, therefore, that an increase in interconnection
capacity, with the attendant growth in electricity exports
to Spain, would significantly promote correct price
formation on the organised market (particularly at times
of low or average demand, when supply from Endesa
and Iberdrola would not be necessary to meet demand)
and under bilateral contracts and would in particular
bring about a substantial reduction in prices on the
Spanish wholesale market, thereby rendering it more
accessible, boosting competition and weakening the
Increasing intercon-
existing duopolistic dominance.
nection capacity would, finally, create a large capacity
reserve, in other words an excess of supply in relation to
demand, in an electrical system in which a good is traded
that cannot be stored.

(96)

In their responses to the statement of objections, the
Parties argue that this analysis is an oversimplification.
However, they fail to provide any reliable data estab-
lishing that increased interconnection would not be
accompanied by a drop in prices on the Spanish market,
as happened in the situation previously analysed, other

(93) The investigation has shown that the recent evolution of
the electricity market confirms the validity of the above
analysis. In particular, the fall in prices that took place
on the Spanish market between 2000 and 2001 as a

(40) The average price of electricity on the generating market fell
from ESP 7,46 (EUR 0,04) in March 2000 to ESP 4,31 (EUR 0,03)
in March 2001.

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Official Journal of the European Union

L 48/103

than EnBW’s assertion that there is no link whatsoever
between the capacity ratio and electricity prices. In any
case, this assertion is not even borne out by EnBW’s own
figures as regards price forecasts for 2002; disregarding
Belgium and the Netherlands, in the countries where the
interconnection capacity levels in relation to demand at
peak times are less than 15 % (Italy, Portugal and Spain)
the prices are higher than in the other countries where
the levels are over 15 % (Germany, Switzerland, France
and Austria) (41).

5. The operation cannot be conducive to competition
unless French-Spanish interconnection capacity is
increased

(97)

(98)

In the reply to the statement of objections, the notifying
parties state that the operation under consideration is
conducive to competition vis-à-vis Endesa and Iberdrola.
Specifically, EnBW argues that following the merger ‘the
dominant position of the members of the duopoly
will be weakened and price competition will increase’,
principally owing to EnBW’s ability to support Hidrocan-
tábrico with its technical know-how and to the fact that,
as a member of the EDF group, Hidrocantábrico would
be eligible for financial support and better credit rates,
enabling it to make successful acquisitions or build new
power plants.

In this regard, the Commission would again point out
that, as previously shown, the price level on the Spanish
market is affected by increases in the amount of cheap
energy supplied in the pool. An anticipated change in
the ownership of a plant such as Viesgo, owned by
Endesa, accounting for 5 % of existing generating
capacity in Spain (+ 2 500 MW) entails neither an
increase in cheap energy supplied to the pool nor a
substantial decrease in Endesa’s market share. Further-
more, it should not be forgotten that (unless there is an
increase in interconnection capacity) the creation of a
structural link of control between EDF and Hidrocantá-
brico entails the disappearance of the main source of
outside competition on the Spanish market. These points
are considered in more detail below.

6. The planned increase in generating capacity in
Spain will not bring about the disappearance of
the Endesa-Iberdrola duopoly

(99) While it may well be the case, as stated above, that
Hidrocantábrico’s generating capacity could be boosted
in the coming years (improving its position on the
Spanish market), it should be borne in mind that, despite

(41) Between 37,5 % (Switzerland and Austria compared to Spain

and Portugal) and 90 % (France compared to Italy).

the legal ban, cited by EnBW, preventing the members
of the duopoly from investing in new capacity for the
time being (42), the two companies are also set to open
new generating plants in the near future. For example,
there is San Roque (Endesa) with installed capacity of
400 MW, Besós (Endesa and Gas Natural) with installed
capacity of 800 MW, Castellón (Iberdrola, Repsol and
BP) with installed capacity of 800 MW, Castejón (Iberd-
rola) with installed capacity of 400 MW, all scheduled
to go into operation in 2002. This means that the likely
generation shares for Endesa and Iberdrola over the
coming years will probably not differ substantially from
the current shares, at least not to the point of thereby
putting the existing duopoly at risk.

(100) Finally, although according to figures at

the Com-
mission’s disposal (43), the new plants planned are set to
increase generating capacity by about 10 to 15 % by
2005, given the likely increase in demand and the cost
of
the energy generated (much higher than energy
produced in France and other European countries), the
increase in energy supplied to the pool from the new
plants is not expected to have any effect on prices (44) or
on the ability of Endesa and Iberdrola to set prices. It
should not be forgotten that energy from combined
cycle plants (which is basically where the additional
energy to be supplied to the pool in the coming years
will come from) is much more expensive to produce
than the nuclear energy produced by EDF and that, as
stated above, a large number of the new combined cycle
plants expected to go into operation between now and
2005 will be entirely or partly in the hands of Endesa
and Iberdrola.

(42) Article 16 of Royal Decree-Law No 6/2000 of 23 June 2000
provides that ‘electricity producers whose installed generating
capacity under the ordinary scheme throughout mainland Spain,
on the date of entry into force of this Decree-Law, exceeds 40 %
of the total [Endesa]* may not increase their installed capacity
for a period of five years. For producers whose share of such
installed capacity is less than 40 % but more than 20 %
[Iberdrola]*, the period shall be three years’. Hidrocantábrico
could take advantage of the above restrictions in order to gain
extra market share, in particular in view of the fact that, according
to data compiled by the Spanish National Energy Commission,
electricity consumption is expected to grow by a total of around
12 % between 2001 and 2005.

(43) Source: Spanish Ministry of Economic Affairs.
(44) In its reply to the statement of objections, EnBW states that an
extra 7 500 MW of generating capacity should be operational by
2003. According to the Commission’s information, the additional
installed capacity to be operational by 2003 would be less than
5 000 MW.

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Official Journal of the European Union

18.2.2004

(101) Therefore, although the planned increase in generating
capacity,
in particular as a result of new operators
entering the Spanish wholesale electricity market, may
improve competition in a clearly limited way,
it is
unlikely to bring about the disappearance of the Endesa/
Iberdrola duopoly. The entry of EDF through Hidrocan-
tábrico together with a blocking of the increase in
French-Spanish interconnection capacity would, there-
fore, reinforce the duopoly state of affairs (as it stands
and as it is forecast for the future).

the construction of new capacity by Endesa and Iberdro-
la) or through a policy of acquiring generating capacity.
In any event, the expansion margin in question will not
foreseeably place EDF in a position to put an end to the
duopoly formed by the two main existing operators. On
the other hand, and as spelled out in greater detail
below, it is unlikely that there will be economic and
commercial incentives for EDF to adopt behaviour that
would cause a large fall in the existing level of prices on
the Spanish wholesale market.

7.

Following the proposed merger, there will no
longer be incentives for EDF to push for a substan-
tial increase in interconnection capacity between
France and Spain

EDF’s financial stake in Hidrocantábrico

(102) Following implementation of the proposed merger, it is
likely that EDF’s strategic position with regard to the
Spanish market will alter fundamentally and its medium-
and long-term commercial goals will undergo significant
change.

(a) EDF will acquire a large amount of generating
capacity in Spain and, as a result, a major
presence on the Spanish electricity market

(103) Through the operation, EDF will acquire joint control of
Hidrocantábrico, which has approximately a 5 % share
of total installed generating capacity in Spain. Hidrocan-
tábrico has furthermore traditionally acted as a net seller
of electricity on the wholesale market. In particular, its
share of sales in the daily pool market exceeded [5 to
10]* % in 2000. To this should be added EDF’s activities
as a foreign operator, i.e. its exports to the Spanish
market, which represented some [< 5]* % of sales on the
daily market during the same period.

(104) EDF will, following the merger, control, either directly
or jointly and indirectly, a volume of electricity on the
Spanish market corresponding to around [9 to 12]* %
of sales on the daily wholesale market. This will give it a
major presence on the Spanish electricity market, close
to that of the third operator (Unión Fenosa) but still
far behind the two dominant operators (Endesa and
Iberdrola).

(105) EDF’s position on the Spanish market could also be
strengthened in future, albeit to a limited extent, in so
far as Hidrocantábrico acquires a higher profile on
the generating market, either by building new power
stations (45) (taking advantage of the legal restrictions on

(106) During the investigation,

the Parties argued that,
although there can be no doubt that EDF will acquire
joint control of Hidrocantábrico as a result of the
operation, its financial stake in that company will remain
limited in so far as EDF owns 34,5 % of EnBW, which in
turn has a 50 % stake in Ferroatlántica, which in turn
owns around 60 % of Hidrocantábrico. On this basis
they claim that EDF will not be greatly involved in the
running of Hidrocantábrico, something that will be
reflected in adoption of the strategic decisions referred
to in this Decision.

(107) It has firstly to be stressed that EDF will acquire, albeit
joint and indirect, control over Hidrocantábrico. This
suggests that, apart from the concrete financial incen-
tives, by acquiring a stake in a firm operating in the
same sector in a market which is extremely attractive to
it EDF is pursuing a number of strategic and industrial
goals (acquisition of a stake in REE’s equity (46), resulting
in additional information about the management of the
Spanish transmission system; positioning itself as a
pan-European supplier; opportunities for exporting to
Morocco and Portugal without any need to increase
interconnections between Spain and France).

(108) In addition to this initial finding and making a dynamic
analysis, the investigation has revealed that EDF’s finan-
cial stake in Hidrocantábrico can and will in all likelihood
be stepped up in the near future. This increase may take
several
involving, for example, Ferroatlántica
holding a larger financial stake in Hidrocantábrico, or
EnBW or EDF directly acquiring shares in Hidrocantá-
brico, or EnBW holding a larger financial stake in
Ferroatlántica, or EDF holding a larger financial stake

forms,

(45) In particular, Hidrocantábrico has a permit to build a plant in

(46) Endesa, Iberdrola, Unión Fenosa and Hidrocantábrico each hold

Navarre with an installed capacity of 400 MW.

10 % of REE’s equity.

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Official Journal of the European Union

L 48/105

in EnBW. As regards the Hidrocantábrico shares not
acquired by Ferroatlántica in the notified operation, it
should be pointed out that the operation took place at a
time when there were as many as three takeover bids to
gain control of the electricity company (although one of
them was subsequently withdrawn). The interests of the
remaining Hidrocantábrico shareholders could, there-
fore, change after consolidation of the control situation
following the notified operation, which could put EDF
in a position to increase its stake in Hidrocantábrico
(directly or indirectly). Furthermore, the inquiry has
revealed that EDF also has clear strategic economic
and financial
incentives for increasing its stake in
Hidrocantábrico. If EDF were to take a larger financial
stake in Hidrocantábrico, it would increase its share in
the profits from the running of the company, and, as
explained below, this increase would be greater than the
profits which it would obtain through stepping up
interconnection capacity.

(109) At all events, the inquiry has shown, as explained below,
that even if EDF and Hidrocantábrico exercise joint
control with an indirect
financial stake of around
10 %, EDF will have fewer incentives to step up
interconnection capacity than prior to the merger, when
EDF had no generating capacity in Spain.

(b) The substantial strengthening of EDF’s position
on the Spanish market will be achieved without
any increase in the supply of electricity in
Spain

(110) As stated earlier, EDF will as a result of the operation
acquire joint control of Hidrocantábrico, whose elec-
tricity generating capacity stands at around 2 175 MW.
As already mentioned,
that capacity may also be
increased in future.

(112) Such an increase in interconnection capacity and conse-
quently in exports to Spain could be expected to have a
definite impact on prices on the Spanish wholesale
market, as explained earlier. Increased interconnection
capacity would furthermore benefit not only EDF but
also other European operators interested in exporting to
the Spanish market.

(113) By means of the proposed operation, on the other hand,
EDF will acquire a substantial presence on the Spanish
market without this resulting in an increase in the
volume of electricity offered in the pool and without
threatening the situation of joint dominance and high
prices currently prevailing in Spain.

(c) EDF will probably be interested in maintaining
the relative isolation of the Spanish electricity
market in order to prevent new competitors
challenging the current price level

(114) EDF will cease being a mere foreign operator exporting
to Spain and will gain joint control of one of the
operators on the Spanish market. The combination of
(joint) control over a sizeable amount of domestic
generating capacity on the Spanish market, as a result of
the proposed operation, with use of most of the existing
interconnection capacity can be expected to bring about
a qualitative shift in EDF’s strategic interests.

(115) EDF will in this way be joining forces with an operator
which is already well established on the Spanish market
and has its own production capacity. The specific
features of
the Spanish company’s generation mix
(electricity produced essentially by thermal power sta-
tions) also appear to dovetail neatly with those of EDF
(essentially nuclear power).

(111) In order to succeed in placing on the Spanish market an
equivalent amount of additional electricity as a foreign
exporter, in other words through exports from France,
EDF would first have to secure a significant increase in
interconnection capacity between France and Spain.
Even if there were no change in the present situation, in
which EDF generally has the use of some [70 to 80]* %
of existing commercial
interconnection capacity, the
present interconnection would have to be increased by
at least around 3 000 MW, bringing total commercial
interconnection capacity to over 4 000 MW. This figure
is a conservative estimate, since if a lower interconnector
utilisation rate and some expansion in Hidrocantábrico’s
capacity are assumed the interconnection capacity
required would be substantially higher.

(116) The investigation shows that, following the merger,
logically be more interested in exploiting
EDF will
its comfortable situation on the oligopolistic Spanish
market, taking advantage of the excessive prices prevail-
ing in the pool, than in boosting exports to Spain by
increasing interconnection capacity. This is because a
substantial increase in interconnection capacity and the
resultant increase in imports into the pool would lead to
a substantial drop in pool prices, as explained above.
This would have an impact on Hidrocantábrico’s profits
(and, indirectly, on those of EDF). In view of Hidrocantá-
brico’s generation mix, the abovementioned reduction
in the prices at which it sells electricity would probably
also be accompanied by a relative reduction in the
amount sold, particularly as regards electricity produced
at higher marginal costs. Such reductions in the amounts

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Official Journal of the European Union

18.2.2004

sold by Hidrocantábrico and in the pool prices would
certainly lower the profits which EDF derived from
Hidrocantábrico’s activities, and, as the investigation has
shown, they would not be compensated for by an
increase in EDF’s exports to the Spanish market, which,
in their turn, would be paid for at the lower marginal
price resulting from the opening up of the market as a
consequence of the substantial
increase in intercon-
nection capacity.

(119) In the light of the factors outlined above, it can therefore
be concluded that the most advantageous strategy for
EDF, following implementation of the merger, will be to
align its commercial strategy on that of the other Spanish
the
electricity companies, within the framework of
existing duopoly. EDF, like the other generators, will
earn large profits as long as prices remain high in the
pool. EDF, as an exporter to Spain, will also continue to
benefit from the higher level of prices in Spain than in
France.

(117) It will certainly be advantageous for EDF to maintain the
to
existing status quo with high prices enabling it
maximise profits and recoup its investment. On account
of its joint control of EnBW, EDF will have a clear
interest in ensuring that the assets acquired in the
operation generate profits offsetting the costs incurred
in making the investment, and this can be achieved by
maintaining the high level of prices in the pool. In view
of the above, EDF will be able to maximise its profits
not by substantially increasing interconnection capacity,
but by raising by a relatively limited amount Hidrocantá-
brico’s generating capacity and its sales on the Spanish
market, which would not jeopardise current pool prices.

(118) By expanding Hidrocantábrico’s generating capacity in
Spain, EDF will maintain total control over the reper-
cussions of its decision on the capacity structure of the
Spanish market, whilst, as noted above, the increased
interconnection capacity would benefit not only EDF,
but also other operators based outside the Iberian
peninsula, with which EDF would have to compete in
order to obtain substantial benefits from the new
interconnection capacity (particularly if there were a
system of bids for access to that capacity). Once EDF has
established a significant presence in Spain, it will have
an interest in maintaining a barrier to entry in the form
of a manifestly inadequate interconnection capacity,
thereby ensuring that other operators based in Member
States outside the Iberian peninsula do not enjoy
increased opportunities to step up their exports to the
Spanish market, with the impact which that would have
on market prices. It should be stressed that the decision
to oppose an increase in interconnections does not rule
out alternative strategies for EDF’s growth on the Spanish
market involving an increase in Hidrocantábrico’s gener-
ating capacity, as noted above. In other words, failure
to increase interconnection capacity is a means of
maintaining entry barriers to exports to Spain for
operators not based there, without significantly affecting
EDF’s alternative strategies.

(120) Under the existing system of capacity allocation, EDF
will continue to take advantage of the possibility of
using the bulk of interconnection capacity for its own
exports to the Spanish market. Even if the agreed change
in the allocation system (which, in principle, will not
affect the quantities laid down in the contract between
EDF and REE) were to be implemented in the near
future, it is safe to assume that EDF will continue to have
access to a large share of the interconnection capacity,
which it could use in order to make large profits on
electricity exported to Spain. The existing intercon-
nection capacity will in fact prevent effective compe-
tition developing on the wholesale electricity market in
Spain with operators established in other countries. As
things currently stand, the role played on the Spanish
market by such operators, with the exception of EDF, is
minimal. If interconnection capacity is not increased
substantially in the years ahead, the role played by
operators established outside Spain will continue to be
marginal, with the result that Spanish operators, and
now also EDF, would be able to continue fairly safely
selling electricity on the Spanish market without being
exposed to effective competition from foreign operators.

(121) Under such circumstances it would be highly unlikely
that other competitors not established in Spain could
successfully compete on the Spanish market, given
the limited interconnection capacity, even if the new
capacity allocation system was to grant them greater
access thereto. On the basis of the figures quoted earlier,
available commercial capacity on the French-Spanish
interconnection amounts approximately to [500 to
600]* MW (total commercial capacity of 1 100 MW
minus the [500 to 600]* MW reserved under the long-
term contract between EDF and REE). Account also has
to be taken of the fact that there is no guaranteed
commercial interconnection capacity for third parties
since the only commercial capacity guarantee is reserved
for the EDF-REE contract. Even assuming that
the
allocation mechanism were altered so as to offer foreign
suppliers greater interconnection capacity,
the total
amount of imported electricity offered to the Spanish
wholesale market would represent a market share of less
than [5]* %. Being on such a small scale, those offers
would not be able to significantly influence prices in the
pool.

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(122) In their responses to the statement of objections the
notifying parties claim that the Commission cannot
prove that, in purchasing Hidrocantábrico, EDF would
have no incentive to compete through imports: Grupo
Villar Mir states that ‘since EDF would only be purchasing
a minimal stake in Hidrocantábrico, it would be surpris-
ing if its shares were sufficiently profitable to compensate
EDF for the revenue it would forfeit by giving up the
option of importing electricity.’ In response to such
claims the Commission would refer first and foremost
to the previous section, which sets out the issue of EDF’s
indirect financial stake in Hidrocantábrico and analyses
the incentives for a future increase in that stake.
Moreover, the Commission has never claimed that EDF
is going to stop exporting to Spain; what
it has
questioned is whether EDF will have any incentives
after the merger to promote a substantial increase in
interconnection capacity which could bring down prices
on the Spanish market and which could also benefit
operators other than EDF (operators without a signifi-
cant generating capacity in Spain, which therefore have
different business goals).

8. EDF/RTE will be in a position to prevent a
substantial increase in interconnection capacity
between France and Spain

(123) During the investigation, EDF and EDF/RTE stated that,
under French law, it was for the latter, as the operator of
the French grid, to decide on any measure aimed at
increasing, on the French side, interconnection capacity
with Spain. Both entities stressed EDF/RTE’s financial
and operational independence from EDF and its regulat-
ory obligations with regard to operation of the French
grid. In short, they argued that EDF had no power over
decisions on whether or not to increase interconnection
capacity.

(125) It must be noted, however,

that

from a legal and
organisational standpoint EDF/RTE is a division of EDF
and has no separate legal personality (47). Second, the
Director of EDF/RTE is appointed by the French Energy
Minister from a shortlist of candidates submitted up by
the Chairman of EDF. In any event, and even if the
measures taken to ensure EDF/RTE’s independence from
EDF are accepted as effective, the fact remains that both
form part of one and the same economic unit, an
industrial group belonging to the French State, which in
the final analysis controls both EDF and EDF/RTE. Under
such circumstances, the taking of decisions on key issues
or of other types of strategic decisions for the operation
of EDF/RTE is clearly subordinated to the French auth-
orities, and in particular the Energy Ministry, without
prejudice to the powers of the electricity regulator, the
Commission de régulation de l’électricité (CRE).

(126) It is the French State which is ultimately responsible for
decisions on interconnections. In particular, EDF/RTE is
required to submit the plan for the development of the
public grid every two years to the Minister for Energy (48).
The plan must be approved by the Minister after the
CRE has given its opinion. The owner of EDF, the French
State, therefore has the last word on whether or not
interconnection capacity is to be increased, a decision
which, as already mentioned, directly affects EDF’s
strategic interests.

(127) It is not unreasonable to conclude, in short, without
thereby denying the autonomous operation and inde-
pendent management of EDF/RTE, that interconnection
capacity between France and Spain will not be substan-
tially increased if this might be clearly detrimental to
EDF’s interests and, consequently, those of its owner, the
French State, which holds the power to take the final
decision on the issue.

VI. COMMITMENTS MADE BY EDF AND EDF/RTE

(128) EDF/RTE and EDF have offered to make commitments
to resolve the problems of competition identified by
the Commission. These commitments, which have the
French Government’s explicit support, are attached to
this Decision (Annexes I and II respectively). In brief,
they are as follows:

(124) EDF/RTE is indeed entrusted with the task of operating
the electricity grid in France, which includes taking
decisions on issues to do with allocating and increasing
the interconnection capacity between France and Spain
by either upgrading existing lines or planning new ones.
In carrying out these tasks, EDF/RTE claims that it
enjoys functional and operational independence and has
resources of various kinds necessary for fulfilling them.

(47) Article 12 of Law No 2000-108 of 10 February 2000 provides
that ‘Within Electricité de France, the department operating the
public electricity transmission network shall carry out its tasks
...’ (emphasis added).

(48) Article 14 of Law No 2000-108 of 10 February 2000.

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COMMITMENTS OFFERED BY EDF/RTE

(129) EDF/RTE commits itself to adopting the measures and
carrying out the work necessary to increase the commer-
cial interconnection capacity between France and Spain
in the following stages:

to the Commission for any measures deemed necessary
to ensure such compliance, including the preparation of
alternative and/or additional feasibility studies to those
presented by EDF/RTE. The third party will also have to
take account, in carrying out the task entrusted to it, of
any relevant information or studies originating from
interested parties,
in particular the National Energy
Commission or REE.

— an additional 300 MW, through technical improve-
ments to the existing lines by the end of 2002,

COMMITMENTS OFFERED BY EDF

— an additional 1 200 MW through the construction
of a new line [...]*. This additional capacity could be
increased to [...]* after the technical and economic
feasibility is checked out,

— an additional 1 200 MW through the construction
of an alternative line, the doubling of an existing
line or the reinforcement of the French lines in the
medium term, provided that technical-economic
feasibility studies to be drawn up by the end of
2002 justify such construction work.

(130) The increase in commercial capacity must result in an
available capacity equivalent to 75 % of the additional
increase for 85 % of the hours of the year.

(131) The above deadlines can be extended if the construction
work cannot be completed for reasons not attributable
to EDF/RTE. However, as regards the third stage of
the interconnection capacity increase, the Commission
would point out that, although the precise timetable for
the work is to come out of the feasibility studies referred
to, the commitments nonetheless include a reference
timescale (the construction work must be carried out ‘in
the medium term’). The timescale will have to be
finalised in accordance with the actual project to be
carried out (construction of a new line, doubling or
reinforcement of existing lines). According to the investi-
gation carried out by the Commission, the reference
timescale will have to be between four and eight years
following conclusion of the studies referred to.

(133) In order to resolve the problems of competition arising
from its acquisition of control over Hidrocantábrico,
EDF undertakes to support an increase in intercon-
nection between France and Spain and, in particular,
fulfilment of the abovementioned commitments by EDF/
RTE in the stages described.

(134) To do this, it commits itself to taking part in the work
of the users’ group set up by EDF/RTE and to providing
RTE with any information at its disposal which could be
useful in conducting technical and economic studies on
the construction of new lines or other means of boosting
interconnections between France and Spain.

(135) EDF also commits itself to paying the third party or
parties responsible for checking compliance with the
commitments entered into by EDF/RTE, if this should be
necessary.

EVALUATION

(136) The commitments described above will reduce the
isolation of the Spanish electricity market in the future,
significantly increasing the chances that operators based
outside the Iberian peninsula can compete on the
Spanish market. The increase in interconnection levels
will make it possible to step up electricity exports to the
Spanish market, which will have a positive effect on the
level of pool prices and the capacity of the members of
the existing duopoly to fix those prices.

(132) One or more third parties will be appointed to check
compliance with the commitments, and must be
approved by the Commission. The third party will
need to receive from EDF/RTE all the information and
assistance necessary to carry out
its task and will
provide regular progress reports on compliance with the
commitments, as well as being able to make proposals

(137) The commitments offered by EDF/RTE and EDF are
therefore sufficient to avoid strengthening the dominant
position of Endesa and Iberdrola, which would be based,
after the merger, on the probable maintenance in the
future of the present electrical interconnection capacity
between France and Spain, which is clearly inadequate.

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(138) Finally, the Commission wishes to make it clear that,
despite the claims made by EDF/RTE in its submission
(specifically in the preliminary statement), the company
is an undertaking concerned within the meaning of
Article 8(2) of the Merger Regulation and, as such, is
capable of entering into commitments to ensure that the
notified operation is compatible with the common
market. The reason for this is that, despite the claim that
EDF/RTE is independent of EDF, both entities belong to
one and the same business group owned by the French
State, as explained above.

stages necessary to see through the structural change
aimed at. This refers, in particular, to the provisions
concerning the official(s) charged with monitoring the
implementation of
the commitments (section 3 of
Annex I, apart from the stipulation under recital 139(b)),

HAS ADOPTED THIS DECISION:

VII. CONCLUSION

Article 1

(139) Having regard to the above, provided that the commit-
ments laid down in the Annexes to this Decision are
observed in full, the proposed merger will neither create
nor strengthen a dominant position as a result of which
effective competition would be impeded in a substantial
part of the common market. The operation is therefore
declared compatible with the common market and
with the functioning of the EEA, in accordance with
Article 8(2) of the Merger Regulation, provided that the
Parties abide by the following commitments:

(a)

(b)

to increase interconnection capacity as laid down
in section 2 of Annex I (subject to review by
the Commission in accordance with section 4 of
Annex I);

to comply with any measures required by the
Commission as recommended by the official(s)
charged with monitoring the implementation of
the commitments to ensure that the Parties abide
by them as stated in section 3(9) of Annex I.

(140) The abovementioned aspects of the commitments con-
stitute conditions, since only if they are fulfilled (notwith-
standing any changes made further to section 4 of
Annex I) can there be a structural change in the
wholesale electricity market in Spain. The other aspects
of the commitment are duties, since they are practical

involving the acquisition of

The notified operation,
joint
control of Hidroeléctrica del Cantábrico SA by the Spanish
firm Grupo Villar Mir and the German company Energie
Baden-Württemberg, the latter jointly controlled by the French
firm Electricité de France and the German firm Zweckverband
Oberschwäbische Elektrizitätswerke, is hereby declared com-
patible with the common market and with the functioning of
the EEA Agreement, provided that the commitments set out
in Annexes I and II are respected in full.

Article 2

This Decision is addressed to:

Ferroatlántica SL
Po de la Castellana 86, 7a
E28046 Madrid

Energie Baden-Württemberg AG (EnBW)
Durlacher Alle 93
D76131 Karlsruhe

Done at Brussels, 26 September 2001.

For the Commission

Mario MONTI

Member of the Commission

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ANNEX I

COMMITMENTS

The full Spanish text of the commitments referred to in Article 1 may be consulted on the following Commission
website:

http://europa.eu.int/comm/competition/index–en.html

ANNEX II

COMMITMENTS

The full Spanish text of the commitments referred to in Article 1 may be consulted on the following Commission
website:

http://europa.eu.int/comm/competition/index–en.html