2005/801/EC: Commission Decision of 9 December 2004 declaring a concentration incompatible with the common market pursuant to Article 8(3) of the Council Regulation (EEC) No 4064/89 (Merger Regulation (ECMR)) (Case No COMP/M.3440 — EDP/ENI/GDP) (notified under document number C(2004) 4715)   (Text with EEA relevance)
Date: 2004-12-09
Institutions: European Commission
Subjects: Portugal, economic concentration, electrical industry, gas industry, merger control

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COMMISSION

COMMISSION DECISION

of 9 December 2004

declaring a concentration incompatible with the common market pursuant to Article 8(3) of the
Council Regulation (EEC) No 4064/89 (Merger Regulation (ECMR))
(Case No COMP/M.3440 — EDP/ENI/GDP)

(notified under document number C(2004) 4715)

(Only the English version is authentic)

(Text with EEA relevance)

(2005/801/EC)

On 9 December 2004 the Commission adopted a Decision in a merger case under Council Regulation
(EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings (1),
and in particular Article 8(3) of that Regulation. A non-confidential version of the full Decision can be
found in the authentic language of the case and in the working languages of the Commission on the
website of the Directorate-General for Competition, at the following address: http://europa.eu.int/comm/
competition/index_en.html

(1)

(2)

I. THE PARTIES

Energias de Portugal, SA (EDP) is the incumbent elec-
tricity company in Portugal. As such, its main activities
consist of generation, distribution and supply of elec-
tricity in Portugal. EDP also controls
the Spanish
company Hidrocantábrico, which is active in Spain in
the sectors of electricity and gas. EDP is listed on the
Euronext Lisbon and the Portuguese State holds directly
or indirectly about 30 % of the shares.

ENI SpA (ENI) is active in the exploration and production
of oil and natural gas worldwide. ENI is also active in the
supply, transmission, storage, distribution and trade of
natural gas. Moreover, ENI holds shares in companies
with transportation capacities which are active in the
operation of the trans-national pipelines for transmission
of natural gas.

(3)

Gás de Portugal, SGPS, SA, (GDP) is the incumbent gas
company in Portugal. GDP is a wholly-owned subsidiary
the Portuguese company Galp Energia, SGPS, SA
of

(1) OJ L 395, 30.12.1989, p. 1. Regulation as last amended by Regu-

lation (EC) No 1310/97 (OJ L 180, 9.7.1997, p. 1).

(GALP), currently jointly controlled by the Portuguese
State and ENI, with interests in both the oil and the
gas sectors. GDP and its subsidiaries cover all levels of
the gas chain in Portugal. GDP, through its subsidiary
Transgás,
imports natural gas into Portugal, through a
Maghreb-Spain-Portugal pipeline and through the Sines
LNG terminal, and is responsible for the transportation,
storage,
transport and supply through the Portuguese
high-pressure gas pipeline network (the Network). GDP
is also active in the natural gas supply to large industrial
customers and in the development and future operation
of the first underground natural gas storage caverns in
Portugal. GDP, through GDP Distribuição (GDPD), also
currently controls five of the six local gas distribution
companies (LDCs) in Portugal.

(4)

Rede Eléctrica Nacional SA (REN) is not a notifying party
for the present concentration but takes part in the overall
transaction to which this concentration belongs. REN is a
Portuguese company resulting from the 1994 spin-off
from EDP of the Portuguese electric grid. REN currently
manages the Portuguese electric grid and acts as Single
Buyer, buying electricity from producers and reselling it
to the distributor/supplier for the supply of the non-
eligible clients. The Portuguese State controls directly or
indirectly 70 % of REN while the remainder is held by
EDP.

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(5)

(6)

II. THE OPERATION

The present case concerns a concentration by which EDP
and ENI (the parties) plan to acquire joint control over
GDP. The operation foresees that the gas transmission
network (i.e. excluding Sines LNG terminal,
import
pipeline and Carriço underground storage) will be trans-
ferred to REN, the Portuguese electricity grid operator
within a given timeframe. During a transitory period,
the gas network, along
EDP will have control over
with ENI and REN.

According to the second gas directive (2) and the dero-
gation granted to Portugal, 33 % of the Portuguese gas
market shall be liberalised at the latest by 2007, all non-
residential customers at
the latest by 2009 and all
customers (including residential customers) at the latest
by 2010. The Portuguese government may decide to start
the liberalisation process earlier.

mainly acquires electricity from a group of power
stations
to Power
(the bound generators), pursuant
Purchase Agreements (PPAs).

(10) Under the PPAs, bound generators undertake to supply
electricity to the SEP on an exclusive basis for a term of
more than 20 years and under a fixed price formula (4).
The construction of those bound generation plants is not
liberalised but regulated by the State. According to the
applicable legislation, the following companies are inte-
grated in the SEP: EDP (through EDP Produção and
Companhia Portuguesa de Produção de Electricidade),
Tejo Energia (5), and Turbogás (6). Most of the electricity
in Portugal (83 % in 2003) (7) is supplied through these
exclusive PPAs between REN and power producers.

III. RELEVANT MARKET

A. RELEVANT ELECTRICITY MARKET

(11)

The electricity acquired by REN is then sold to the
regulated distributor, which is controlled by EDP, under
a regulated tariff system. Regulated tariffs are set by the
Portuguese energy regulator, ERSE.

1. RELEVANT PRODUCT MARKET

(7)

Taking into consideration the specifics of the Portuguese
markets and the competitive and regulatory framework,
the Commission has reached the conclusion that
the
following markets should indeed be distinguished:

(12)

(i) wholesale supply of electricity,

(ii) provision of regulating/balancing power services (3),

system (SEI)

is composed of

The independent
the
unbound system (Sistema Eléctrico Não Vinculado, SENV),
which operates under free market conditions (i.e. most of
this power is finally sold to the customers who switch
the regulated system), and the special regime
out of
system (Produtores
in which
generation by co-generation plants, mini-hydro plants,
and other
such as wind power
renewable energies
plants is supplied to REN at regulated tariffs.

especial, PRE),

em regime

(iii) transmission grid,

(iv) distribution grid,

(v)

retail supply of electricity (large customers and small
customers).

The National Electric System is organised in two co-
existing systems, the public electricity system or ‘bound
system’ (Sistema Eléctrico de Serviço Público, SEP) and the
independent electricity system (Sistema Eléctrico Inde-
transmission grid is used
pendente, SEI). The national
for both systems and is exploited under a concession
regime by Rede Eléctrica National (REN).

SEP is a regulated system that covers generation and
distribution. It is composed of ‘bound’ generators and
‘bound’ distribution networks.
In this system, REN is
the single buyer of electricity at the wholesale level. It

(8)

(9)

(2) Directive 2003/55/EC of

the
Council of 26 June 2003 concerning common rules
the
internal market in natural gas and repealing Directive 98/30/EC
(OJ L 176, 15.7.2003, p. 57).

the European Parliament and of
for

(3) See Case COMP/M.3268-Sydkraft/Graninge.

(13)

Eligible customers are free to choose their electricity
supplier and can therefore purchase electricity either
from the SEP at regulated tariffs, or from the SENV
(being supplied by a free retailer at market conditions).
The Decree Law of 17 August 2004 finally provided that
all clients are eligible (8).

(4) The price formula essentially guarantees the payment for capacity
(which implies a predetermined return on invested capital for the
plant) and for energy (based on a reflection of costs).

(5) Tejo Energia is controlled by the British company International
Power, which holds 45 % of
the shares, and by the Spanish
company Endesa, with 35 % of the shares. EDP and Electricité de
France only hold a minority 10 % interest each, which does not
seem to confer to either of them the possibility to exercise joint
control over the company.

(6) At the time of the notification Turbogás was controlled by the
German power company RWE. EDP holds a 20 % stake, which
does not seem to confer to it
the possibility to exercise joint
control over
the company. RWE has since concluded a sales
agreement with International Power. International Power’s purchase
has been approved by the Portuguese Competition Authority.

(7) 35 TWh out of a total supply of 43 TWh in 2003.
(8) Portugal will thus advance implementation of Directive 2003/54/EC
of the European Parliament and the Council (OJ L 176, 15.7.2003,
p. 37), which provides the full opening the electricity retail markets
as from 1 July 2007.

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(14)

(The existing regulatory framework is currently being
amended.

Wholesale electricity

been unbundled and is operated by REN, the Portuguese
Transmission System Operator. Distribution grids are
owned by EDP and municipalities and are managed by
EDP’s subsidiary EDP Distribuição Energia SA (EDPD).
Access to both transmission grid and distribution grids
is regulated by the Portuguese regulator ERSE.

(15) Wholesale electricity encompasses the production of elec-
tricity at power stations as well as electricity physically
imported through interconnectors for the purpose of
resale to retailers. As in other Member States, a few
very large electricity consumers may also decide to buy
directly from the wholesale market
they
(in Spain,
account
the purchases in the
wholesale market).

less than 5 % of

for

(21)

Retail supply of electricity

The following electricity retail markets will be considered
for the purpose of the present statement: (i) the supply of
electricity to Large Industrial Customers (LICs) which are
connected to the high and medium voltage (HV and MV)
grid and (ii) the supply of electricity to smaller industrial,
commercial
are
connected to the low voltage (LV) grid.

customers which

domestic

and

also very

(22) HV/MV customers and LV customers are very different as
regards their consumption and terms and conditions
under which they purchase electricity. The commercial
different. MV and HV
relationship is
customers are for the most part
industrial costumers
for which electricity may account for a significant part
of their costs. On the contrary, most LV customers are
industrials, commercial or domestic customers
small
whose consumption of electricity per consumers
is
quite limited in volume.

2. GEOGRAPHICAL MARKETS IN ELECTRICITY

(23)

(24)

In past Commission decisions, the relevant geographic
market for the wholesale supply of electricity has been
considered to be no wider than national borders (9). In
shown that
the present case,
wholesale
clearly
are
Portuguese in scope and will remain so in the foreseeable
future.

the investigation has
electricity markets

and retail

The parties argued that an Iberian trading market called
MIBEL would be established very soon and would thus
lead to an Iberian market. This view has not been
confirmed by the in-depth investigation carried out by
the Commission. It appears that (1) the current level of
interconnections between Spain and Portugal
is not
sufficient to consider the existence of a single market
in the Iberian peninsula and (2)
it is highly unlikely
that
electricity wholesale market will become
Iberian in scope in the near future for the following
reasons:

the

(16)

The Commission considers that, as from the termination
of the PPAs, there will be an electricity wholesale market
in Portugal encompassing the offer of the former bound
generation, the unbound generation and imports. The
assessment focuses on this wholesale market irrespective
of the liberalised and regulated systems.

Balancing power and ancillary services

(17)

There is a technical necessity for such service as the
transmission system operator is responsible for main-
taining the tension in the grid within a very narrow
bandwidth. If there is over-consumption, the tension in
the grid would drop and this could cause at some point
network stability problems. A problem also arises if there
is under-consumption as then the tension in the grid
rises above an acceptable tolerance level and the trans-
mission system operator must make sure that either
some generation capacity is switched off or that some
consumption is added.

(18)

This service needs to be paid for and there will usually be
a ‘penalty’ for deviation if demand of a customer exceeds,
or falls below, the expected level which corresponds to
the amount
from the
wholesale level or plans to produce himself and which
he has to communicate in advance to the transmission
system operator.

that each supplier purchases

(19) Currently,

services

in Portugal,

this service, as well as other
(congestion management
ancillary
similar
services),
in the
is provided by REN to all agents
system. There is as yet no established market for such
services in Portugal. However, it is likely that, after the
termination of the PPAs, such a market, or such markets,
will emerge. For the purpose of this decision, the exact
delineation of this emerging market, or these emerging
markets, can be left open.

Transmission and distribution

(i) many important regulatory barriers still have to be
removed for the purpose of the establishment of the
MIBEL;

(20)

These markets
affected by the proposed
operation. In Portugal the transmission grid has already

are not

(9) See e.g. Case M. 2434 — Grupo Villar MIR/ENBW/Hidrocantabrico.

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(ii) competitive conditions between Spain and Portugal
are likely to remain significantly different even after
the launch of the MIBEL;

IV. COMPETITIVE ASSESSMENT

A. ELECTRICITY MARKETS

(iii) CO2 emission national allocation plans and national
compensation scheme for stranded costs are likely to
maintain or even increase these differences in the
competitive conditions;

(iv) the projected level of

interconnection capacity
between Spain and Portugal
is not likely to allow
effective integration of both markets in the fore-
seeable future.

B. RELEVANT NATURAL GAS MARKETS

1. PRODUCT MARKET

(25)

The Commission has identified four distinct gas product
markets which will be affected by the operation:

(i)

supply of gas to power producers (CCGTs (10));

(ii)

supply of gas to local distribution companies (LDC);

(iii) supply of gas to large industrial customers (LICs);

(iv) supply of gas to small
domestic customers.

industrial, commercial and

(26)

(27)

Six local distribution companies (LDCs) distribute and
supply most end-customers through medium and low
pressure (11)
exclusive
and
concession areas.

networks

operate

in

a

of

The market of gas supply to power producers will be the
first to be opened to competition in Portugal. The parties
claimed that CCGTs and LICs should be considered as
single, wider wholesale market. The
part
Indeed,
Commission does not agree with the parties.
power producers have unique demand needs in terms
of quantity and flexibility of supply. CCGTs therefore
long-term contracts, which are
need to combine
necessary for
and
the CCGT
technical viability and supply security of
project, with short-term contracts
for more limited
periods. They also have different margins, customer rela-
tionship; commercial needs of
resellers and growth
dynamics.

establishing the basic

economic

2. GEOGRAPHICAL MARKET

(28) On each relevant gas market, the Commission and the
parties agree that the supply of natural gas in Portugal is
no wider than national.

(10) CCGTs stands for ‘Combined Cycle Gas Turbines’ power plants.
(11) Respectively between 4 and 20 bar and below 4 bar.

(29)

(30)

1. WHOLESALE MARKET

(a) EDP holds a dominant position on the wholesale

market for electricity in Portugal

Following the Commission’s in-depth investigation,
it
appears that EDP holds a dominant position on the
wholesale market in Portugal, irrespective of whether it
is considered under the current structure or after the
termination of the PPAs.

in 2003,

in the wholesale market, EDP holds
Indeed,
for 70 % of
70 % of generation capacity, accounts
generation and is the largest
importer of electricity.
Moreover, EDP’s Portuguese generation portfolio will
the abolition of
remain unmatched after
the PPAs.
the PPAs, a stranded cost
the termination of
After
scheme (CMECs)
is to be put in place to compensate
existing power generators for any possible loss in the
market in the future. This scheme favours incumbents.
EDP is bound to get most of it, which will help shield
EDP from future competition.

(31) On the demand side, EDP holds close to 100 % of the
distribution of electricity in Portugal. EDP Distribução’s
future role as the retailer for the regulated system confer
EDP crucial advantages.

(32) On the supply side, the addition of EDP’s new gas fired
is significant in EDP’s portfolio. As
power-plant (TER)
regard new generation capacities to be built by third
parties,
the Commission has come to the conclusion
that CCGTs projects by competitors are uncertain and
that EDP has influence over one of them (Tejo Energia).

(b) The operation will strengthen EDP’s dominant
position, due to both horizontal and vertical effects

Horizontal effects: removal of a significant com-
petitor

(33) As for the horizontal effects, the Commission came to
the conclusion that, absent the merger, GDP would have
been very likely to become the main competitor in the
electricity markets in Portugal, considering (i) that having
access to competitive gas resources confers a significant
advantage in electricity as gas-fired power plants (CCGTs)
now constitute the most common way of generating new
power and (ii) that GDP, as a Portuguese company, could
rely on its brand and gas customers, to which it could
offer a joint supply of gas and electricity.

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(34)

This significant potential competition would be lost after
EDP’s
the merger,
dominant position.

strengthening

thereby

further

Non-horizontal effects: raising rivals’ costs

Privileged and preferential access to the Portuguese gas infra-
structure (Sines LNG terminal,
import pipeline and Carriço
underground storage)

(35)

Further to the proposed transaction, EDP will have the
ability and the incentive to maintain a privileged and
preferential access to natural gas to the detriment of
companies actually or potentially involved in electricity
generation.

(i)

jointly

control Transgás

(36) High-pressure gas network further to the merger EDP will
be able to have influence on the management of the
in the short term, EDP
high-pressure gas network:
will
gas
network) for a temporary (12) period which may last up
to 19,5 months. During this period, EDP may have a
strong influence on the strategy and management of
the network. This may also provide EDP with a deep
insight into the network operating features from which
EDP may later on draw advantages; (ii) in the long term,
REN will operate the high-pressure gas network as a
result of the merger.

(including

the

(37) GDP’s international pipeline the merged entity would be in
a position to use the first existing entry point in Portugal
(the pipeline which goes
from Algeria to Portugal
through Morocco and Spain and which enters Portugal
in Campo Maior) at a full capacity in order to prevent
competitors to use any freed capacity. Therefore, even if
TPA is applied,
there is currently not enough free
capacity for third parties to import gas on a permanent
basis and with a minimum of certainty as to the level of
gas they will be able to import.

It was

launched at

(38) GDP’s Sines terminal the LNG terminal located in Sines is
the only one in Portugal.
the
beginning of 2004 and is owned and operated by GDP
Its
(through its wholly-owned subsidiary Transgás).
In the
maximum import
capacity is 5.3 bcm p.a.
absence of
liberalisation in the gas sector, so far, no
TPA rule has been imposed on the terminal. As a
result, third parties who would like to have access to
the terminal would have to contact GDP and negotiate
specific terms and conditions with the latter.

(12) The Commission also has to assess intermediate steps in the
in particular as a situation,
impact

evolution of
even though temporary, may have a strong detrimental
on competition and, possibly, long-lasting effects.

the market structure,

(39)

Carriço underground storage further to the merger, EDP will
also be in a position to operate GDP’s Carriço under-
ground storage. This is the only storage of natural gas
available in Portugal (apart from the LNG storage in Sines
for competing
which is much smaller).
power generators operating CCGTs to have access to
the flexibility offered by this storage on a non-discrimi-
natory basis. The market investigation confirmed that
to ensure
these access conditions were not sufficient
from the
that competitors will actually fully benefit
storage, as EDP will be in a position the limit access
by arguing about technical issues.

It is essential

(40)

Further to the operation as notified, EDP acquires a
significant control over the gas entry points as well as
the storage facilities. The operation could thus provide it
with all the necessary means and incentives to make
access to the gas network more difficult for its compe-
titors, even though the high-pressure gas grid in Portugal
is to be ownership-unbundled to REN.

Ability to manage the constraints in the gas supply to CCGTs
to the detriment of competing CCGTs

(41)

The high uncertainties as to the effectiveness of
the
transfer of infrastructures and transport rights to REN
do not ensure that the gas requirements of actual (i.e.
Turbogás) and potential competing CCGTs will be
supplied by another company but
the merged entity.
When restrictions occur in gas supply in Portugal, GDP
will have the incentive to favour EDP’s plants to the
detriment of competing CCGTs.

Ability and incentive to control gas price and raise rivals’ costs,
thereby foreclosing its actual and potential and deterring entry

(42)

Further to the merger, EDP will have the ability and
incentive to raise the price of gas supplied to actual
competitors (Turbogás, for its short-term requirements).
This holds also true for potential competitors (for the
whole of their requirements) since the pace of liberal-
isation and uncertainties as
to entry
points makes it likely that future CCGTs, if any, will be
supplied with gas by GDP.

to the access

Access to proprietary information about EDP competitors’ costs,
conferring it a significant advantage:

(43)

The merged entity will be armed with the knowledge of
its actual competitors’ input costs will be able to price in
such a way so as to foreclose its rivals. Such structural
advantage will also strengthen EDP’s dominant position
as it is likely to further deter or delay entries of potential
competitors willing to operate new CCGTs
through
supplies of gas by GDP.

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Access to the daily gas nomination of
information about
significant advantage;

competitors’

its

its main proprietary
conferring it a

costs,

(44)

Further to the merger, EDP will also have access to the
daily gas nominations of Turbogás (and of other CCGTs
possibly supplied by GDP in the future), that is the infor-
mation one day in advance about the volume of gas that
the CCGT plans to consume on an hourly basis. As a
result, EDP will be able to know in advance the pattern
of power production planned by Turbogás
the
following day. Given the volatility of CCGTs’ production,
this information is strategic: Knowing, for instance, that
Turbogás does not plan to generate power at a certain
time of the following day, EDP will be in a position to
raise its prices above Turbogás’ variable costs with no
fear of losing sales to Turbogás.

for

(45)

The abovementioned horizontal and vertical effects,
together, strengthen EDP’s
considered individually or
dominant position in the electricity wholesale market.

2. ANCILLARY SERVICES

(46)

remove GDP as a likely
The present operation will
electricity market, and therefore a
entrant on the
potential provider of ancillary services. Based on all the
reasons developed in the assessment of the wholesale
market and given that only a few plants can provide
such services, GDP’s entry on the wholesale market
would have weakened EDP’s position in the provision
of ancillary services. The concentration results in the
elimination of this potential competitor in the market
for the provision of ancillary services.

3. RETAIL MARKETS FOR ELECTRICITY IN PORTUGAL

(a) EDP holds a dominant position on the retail

markets for electricity in Portugal

(b) Strengthening of EDP’ dominant position on the

retail market for electricity in Portugal

(49)

The proposed operation will strengthen EDP’s dominant
positions since it will eliminate GDP as a significant
potential competitor. During the Commission’s invest-
igation, respondents have indeed confirmed that GDP
would be the most likely and effective potential entrant
in particular due to its wide gas
on these markets,
its well-known national brand as well
customer base,
its ability to make dual-fuel offers.

the merged

(50) Moreover, the merger will raise further barriers to entry
incumbents’
as
entity will
advantages in gas and electricity and force competitors
to enter simultaneously on the gas and electricity markets
to be able to offer dual-fuel.

combine

B. GAS MARKETS

1. GDP HAS A DOMINANT POSITION ON THE PORTUGUESE

GAS MARKETS

(51) Due to its current position of legal monopolist, GDP
holds a dominant position in all gas markets, with the
only exception of the distribution of natural gas in the
area of Porto where Portgás — a company in which EDP
has recently acquired joint control — is active.

(ii)

(52) GDP enjoys and will keep enjoying after the opening of
the markets significant incumbency advantages vis-à-vis
potential new entrants. In particular, (i) it has gained a
strong experience and knowledge of the Portuguese gas
markets at every level,
it has established a large
customer base and a significant volume of sales in the
country, (iii) it has developed very well known brands
both at national and local level, and (iv) it has acquired a
unique knowledge of the customers’ profile (in terms of
consumption profile, or solvency and credit terms) and
specific needs (such as need for additional services or
through the
(v)
special customer care),
GDP-controlled LDCs, the distribution system operators.

it controls,

(47)

The market for supply of electricity to large industrial
customers (45 % of total consumption) is fully eligible.
On this market, EDP holds a 92 % market share in
volume (much more in customers).

2. STRENGTHENING OF GDP’S DOMINANT POSITION ON

THE PORTUGUESE GAS MARKETS

(a) Gas supply to power producers (CCGTs)

(48)

The small customer market only began to be opened in
the course of 2004. EDP holds close to 100 % market
share. Experience from other Member States
shows
clearly that the switching rates of those clients will be
much lower than those of industrial customers. EDP’s
dominance will
therefore only be challengeable at a
slower pace.

(53) As regards the supply of gas to CCGTs, the notified
operation will foreclose all the gas demand by CCGTs
(namely Turbogás’ (13) and TER/Carregado's short-term
requirements) which could otherwise have been chal-
are
lenged by competitors of GDP, once CCGTs
eligible. This strengthens GDP's dominant position in
the market for the supply of gas to CCGTs.

(13) EDP’s 20 % shareholding in Turbogás confers to it certain blocking

rights.

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(b) Gas supply to LDCs (local distribution company)

(54)

The notified operation will foreclose the gas demand of
the only LDC which is so far not controlled by GDP,
namely Portgás. Further to the operation, no gas supply
to LDCs will be challengeable by gas competitors any
longer, when they become eligible. This strengthens
GDP's dominant position in the market for the supply
of gas to LDCs.

(c) Supply to gas to LICs (large industrial customers)

(55)

The investigation has shown that EDP would have been
the most likely entrant in the market for supply of gas to
large industrial customers, once it is liberalised.

and raise further the barriers to entry in the market for
the supply of gas to small customers.
thus
strengthen GDP’s dominant position in the retail gas
market in Portugal.

It will

V. COMMITMENTS PROPOSED BY THE NOTIFYING PARTIES

(62)

The parties have submitted commitments on 28 October
2004 and an improved version on 17 November 2004.
The 17 November 2004 commitments are summarised
below, using the parties’ numbering:

EDP.1:

Reduction of EDP’s shares in REN from 30 % to
5 %

(56)

EDP appears to be the most likely potential entrant in
this market, considering (i) that it operates a CCGT for
the production of electricity (and hence has access to
a
large quantities of
strong
gas), which confers
(ii) that it
incentive to enter the gas supply markets,
could rely on its electricity customers (EDP controls
close
electricity distribution in
Portugal), to which it could offer a joint supply of gas
and electricity (dual-fuel) and (iii) that it could also rely
on the experience, the reputation and the customer base
of the gas distributor Portgás. The effective entry of elec-
tricity incumbents in gas markets has been witnessed in
many Member States.

to 100 % of

the

(57)

The loss of EDP’s potential competition strengthens
GDP’s dominant position on the market of gas supply
to LICs.

EDP.2: Divestment of EDP’s shares in Tejo Energia

EDP.3: Moratorium concerning the construction of
new CCGTs subject to a review clause

EDP.4:

Lease of TER production capacity equivalent to
one unit subject to a review clause

EDP.5:

Suspension of some of EDP’s voting rights in
Turbogás and appointment of
independent
board members in Turbogás

ENI.II:

Sale of the Sines LNG terminal to REN

ENI.III:

Sale of the Carriço underground storage to REN

(d) Gas supply to small customers

ENI.IV: Anticipated sale of

the gas high-pressure

network to REN

(58)

The Commission has come to the conclusion that, absent
the merger, EDP would have been the most likely entrant
on the market for the supply of gas to small customers.

ENI.V:

Guarantees for access to the network pending
sale of the network to REN

(59)

(60)

EDP’s advantages can be grouped in three main bundles
(a) advantages in procurement due to
of advantages:
EDP’s position as
in
a gas-fired power producer
(b) advantages due to EDP’s position as the
Portugal;
distributor
incumbent
(c) advantages due to its position in and information
on gas retailing in Portugal
(Portgás and information
sharing on Lisboagás).

electricity

retailer

and

EDP’s will to enter the gas markets is further evidenced
by its recent acquisition of control over a Portuguese
in gas
LDC, Portgás,
the
markets
second largest gas company in Spain, Naturcorp).

in Spain (EDP acquired control over

strong development

and its

(61) On the basis of

the
concentration would remove GDP’s main competitor

the abovementioned elements,

ENI.VI: Release to REN of the capacity at the Campo
Maior entry point currently booked and unused
by Transgás

ENI.VII: Commitment not to book further capacity at

the Campo Maior entry point

ENI.VIII: Commitment not to book further capacity on

the Extremadura pipeline

ENI.IX: Commitment to make capacity available on the
the Campo

Extremadura pipeline and/or at
Maior entry point under certain conditions

ENI.X:

Elimination of GDP’s right of first refusal, based
on ‘matching the best offer mechanism’.

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ENI.XI: measures aimed at eliminating concerns related
to possible privileged access to price infor-
mation

ENI.XII: Measures aimed at ensuring scope for

the
the demand repre-

effective liberalisation of
sented by LICs

(66) Given the review clause attached to the proposed mora-
torium, the moratorium is likely to end shortly with no
insurance that new competitors will actually enter the
market. Besides, it does not prevent EDP from starting
new CCGT projects (all steps but the actual building). The
moratorium and the lease proposed thus fall short of
having a pro-competitive effect similar to a structural
remedy.

ENI.XIII: Commitment not to engage in dual offers of
natural gas and electricity to LICs and retail
customers in Portugal until
the natural gas
supply to such customer groups is liberalized

(67)

In addition, the parties propose to divest EDP’s 10 %
share in Tejo Energia, one of EDP’s competitor. If this
is a positive proposal, it does not at all guarantee that
Tejo Energia will actually build a CCGT in the future.

(68)

(69)

(70)

ENI.XIV: Sale of the LDC Setgás.

VI. ASSESSMENT OF THE COMMITMENTS PROPOSED

A. COMMITMENTS ON ELECTRICITY

1. WHOLESALE ELECTRICITY MARKET

(a) Horizontal effects of the operation (removal of GDP

as the most likely entrant)

(63)

The parties’ proposal consists
in a combination of
measures aimed at ensuring the entry of competitors
while, at the same time, avoiding to divest generation
assets. It relies mainly on a moratorium concerning the
construction of new CCGTs by EDP and the lease of
some production capacity of EDP’s power plant TER
for a limited period of time.

(64) Respondents to the Commission’s market test considered
these proposals as clearly insufficient in terms of scale,
scope and duration to compensate for the significant loss
of GDP as a potential competitor and to effectively
ensure the timely entry of potential competitors. The
Commission shares these concerns expressed by third
parties.

(65)

The lease of production capacity from TER is equivalent
to only one third of the plant and would account for 4 %
of the total generation capacity in Portugal. The lease can
be automatically terminated based on criteria which do
not ensure the presence of new competitors nor the
actual existence of an Iberian market. The lease can be
as short as three years. EDP will know in real-time the
costs and volumes of electricity that
the lessee can
market. All
this makes it unlikely that such a lessee
might have a significant influence on the market and
exercise a competitive constraint on EDP.

The parties have also proposed to suspend EDP’s voting
rights in Turbogás. This suspension is limited to a three
year period and to only two specific areas of decision.
EDP has also recently acquired an option to buy 20 %
more share in Turbogás and manage all of Turbogás’
production.
the
parties’ commitments will prevent EDP from exercising
influence on Turbogás’ gas supply policy and future
projects.

therefore quite doubtful

that

is

It

(b) Non-horizontal effects (raising rival costs)

EDP’s privileged and preferential access
Portuguese gas infrastructure

to the

i.e. an ownership unbundling,

The sale of
the Sines LNG terminal and the Carriço
underground storage to the gas high-pressure network
is a positive
operator,
proposal welcomed by the Commission. However, the
terms and conditions attached to these transfers do not
ensure that a sufficient capacity will be available for third
parties. In particular, the remedies explicitly allows subsi-
diaries of the parties active in gas in Spain, Union Fenosa
Gas and Naturcorp, to book further capacity even before
the transfer, as well as the parties after the transfer.

far

(less

test,
than 10 % of

The parties also proposed to make capacity available in
the Spain-Portugal pipeline at Portuguese entry point
this
(Campo Maior). According to the market
capacity is
this
too small
pipeline’s capacity, not enough to supply a single
400 MW CCGT unit) and is not
ensured in the
upstream pipeline (Extremadura pipeline) to bring gas
up to the Portuguese border. A mechanism has been
included to provide
capacity but under
additional
conditions which make the access to this extra-capacity
neither
long-lasting
enough for third parties to rely thereon.

timely, economically feasible nor

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(71)

The commitments on natural gas infrastructures are
therefore likely to have very limited positive effects on
the electricity and gas markets in Portugal.

Other vertical impacts of the merger

(72) As regards the other vertical competition concerns (14)
raised by the operation,
the commitments provide
mainly for Chinese Walls to limit flows of information
between GDP and EDP. The market test clearly indicated
that, in the present case, such measures are not sufficient
to address these issues.

2. MARKET FOR ANCILLARY SERVICES

(73)

The lease of production capacity, as provided for by
commitments, do not allow the lessee to be active in
the balancing power market, which requires adapting
the output of the plant in real-time.

(74) As explained above, the commitments do not ensure
with a sufficient level of certainty that competitors will
build new power generation capacities in Portugal in the
foreseeable future. As a result, the proposed remedies do
strengthening of EDP’s dominant
not
remedy the
position in this market.

3. RETAIL SUPPLY OF ELECTRICITY

(75)

The only remedy which relates directly to the retail
supply of electricity is the commitment not to engage in
dual offers of natural gas and electricity to retail customers
until the natural gas supply to such customer groups is liber-
alised. This commitment would only apply for a limited
period and in any case, this remedy does not ensure the
appearance of competitors to compensate for the loss of
GDP.

(76) Other remedies may indirectly positively affect the retail
electricity market but do not ensure that new compe-
titors will effectively enter the retail supply of electricity
in Portugal in a timely and sufficiently large way so as to
compensate for the loss of GDP’s future competition.

(14) That is: (i) EDP’s ability and incentive to control gas prices and raise
its rivals’ costs, thereby foreclosing its actual and potential compe-
(ii) EDP’s ability to manage the
titors and deterring entry;
constraints in the gas supply to CCGTs to the detriment of
(iii) EDP’s access to proprietary information
competing CCGTs;
about its competitors’ costs and daily gas nominations, conferring
on it a significant advantage.

B. NATURAL GAS MARKETS

1. GAS SUPPLY TO POWER PRODUCERS (CUSTOMER FORE-

CLOSURE)

(77)

Three commitments directly relate to this concern: (i) the
elimination of GDP’s right of first refusal for the gas
the suspension of some of EDP’s
supply of TER,
voting rights in Turbogás for three years and (iii) the
partial lease of TER.

(ii)

(78)

(ii)

first refusal
incentives

(i) Market participants have underlined that the elimi-
nation of GDP’s right of
to supply TER
does not eliminate EDP’s
to source gas
supply from GDP;
the mere suspension of some
time does not
voting rights for a limited period of
prevent EDP’s influence on Turbogás’ gas supply policy;
(iii) the lease accounts only for one third of TER and the
lessee will have to buy most of its gas from GDP. The
Commission therefore considers that these commitments
fall short from addressing the strengthening of GDP’s
dominant position in the market
for gas supply to
power producers.

2. GAS SUPPLY TO LDCS (CUSTOMER FORECLOSURE)

(79)

The operation forecloses the gas demand of Portgás, the
only LDC not controlled by GDP. The gas consumption
of the LDC proposed to be divested, Setgás, is four times
as small as Portgás’. The commitment therefore does not
remove the strengthening of GDP’s dominant position in
the market for the gas supply of LDCs.

3. GAS SUPPLY TO LARGE INDUSTRIAL CUSTOMERS (LICS)

(80)

The only remedies which directly address the concerns
raised in this market are the commitments not to engage
in dual offers (gas/electricity) before the gas liberalisation
of LICs and to offer LICs the possibility to renew their
gas contract on a yearly basis. Both remedies fall short
from ensuring that a new competitor will enter the gas
market for LICs.

(81) Nevertheless,

import
to whether

remedies which may have an indirect
impact on this concern have also been analysed: as
infrastructures, high uncertainties
regards gas
capacities will be
remain as
available. Besides, Setgás, which would be divested,
accounts for less than 10 % of the gas customers in
Portugal and would be a much more limited starting
base to enter the LIC market as compared with EDP’s
electricity and Portgás’ gas customer bases.

sufficient

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4. GAS SUPPLY TO SMALL CUSTOMERS

(82)

sales

retail

for 8 % of

the overall gas

the loss of EDP/Portgás
retail market: Setgás’

The divestiture of Setgás is a structural remedy but does
future
not compensate for
sales
competition in the gas
account
in
Portugal while Portgás holds a 30 % market share. The
commitment not to offer dual-fuel supplies to retail gas
customers who are not yet eligible in both gas and elec-
tricity is very limited in time and effect. No other remedy
has been proposed to directly address
the loss of
potential competition stemming from EDP’s ability to
rely on its nationwide electricity customer base,
its
strong brand and its incentive to provide dual offers
(electricity/gas) to customers.

(84) On Friday evening 3 December 2004,

intentions

the parties
‘gas commitments’ aiming to
submitted new set of
stated by them in the
implement
the
document sent
to the Commission on 26 November
2004. Considering the very late stage of the procedure
at which these new commitments have been presented
(only three working days before the Commission meeting
of 9 December 2004 scheduled for the adoption of the
insufficient
final
the
leaving
decision,
them in accordance with
Commission to assess
procedural obligations) and given that
this proposal
merely aims to implement the intentions expressed in
the document sent on 26 November 2004, this latest
set of commitments cannot form the basis of an author-
isation decision.

time

for

VII. LATE REMEDIES

(85)

(83) After

set

for

the

the deadline

expiration of

the
submission of remedies (15), on 26 November 2004,
the parties submitted documents proposing to amend
the remedies already presented, with a view to addressing
the concerns raised by the Commission. However, these
remedies did not fully and unambiguously remove the
competition concerns identified by the Commission.

VIII. CONCLUSION

together,

For the reasons outlined above, considered individually
or
the Commission issued a decision on
9 December 2004, which declared the proposed concen-
tration incompatible with the common market pursuant
it strengthens
to Article 8(3) of
dominant positions
and electricity
in several
markets in Portugal as a result of which effective compe-
tition would be significantly impeded in a substantial part
of the common market.

the ECMR in that

gas

(15) The deadline for the submission of remedies was 17 November

2004.