2007/353/EC: Commission Decision of 14 March 2006 declaring a concentration compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.3868 — DONG/Elsam/Energi E2) (notified under document number C(2006) 793) (Text with EEA relevance)
Date: 2006-03-14
Institutions: European Commission
Subjects: Denmark, common market, economic concentration, electrical industry, gas industry, merger control, restriction on competition

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(Acts adopted under the EC Treaty/Euratom Treaty whose publication is not obligatory)

II

DECISIONS

COMMISSION

COMMISSION DECISION

of 14 March 2006

declaring a concentration compatible with the common market and the functioning of the EEA
Agreement
(Case COMP/M.3868 — DONG/Elsam/Energi E2)

(notified under document number C(2006) 793)

(Only the English text is authentic)

(Text with EEA relevance)

(2007/353/EC)

On 14 March 2006 the Commission adopted a Decision in a merger case under Council Regulation
(EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the
EC Merger Regulation) (1), and in particular Article 8(2) of that Regulation. A non-confidential version
of the full Decision can be found in the authentic language of the case on the website of the Directorate-
General for Competition, at the following address: http://ec.europa.eu/comm/competition/index_en.html

(1)

(2)

(3)

I. SUMMARY

This case concerns the acquisition of control by DONG
of Elsam, Energi E2, KE and FE.

DONG is the Danish state-owned gas incumbent. Elsam
and Energi E2 (E2) are the Danish electricity generation
incumbents in West Denmark (Elsam) and East Denmark
(E2), respectively. KE and FE are the electricity retail
incumbents in the Copenhagen area.

(4)

The Decision concludes that the transaction leads to a
impediment of
significant
in
particular
strengthening of dominant
through the
positions on the following markets

competition,

effective

— supply of wholesale gas for Denmark (and potentially

also for Sweden),

(1) OJ L 24, 29.1.2004, p. 1.

— gas storage or gas flexibility (irrespective of whether

only for Denmark or also for Sweden),

— supply of gas

to large business customers and

decentral CHPs, as 1 or 2 markets, in Denmark,

— supply of gas to small business customers and/or

households, as 1 or 2 markets, in Denmark.

sufficiently remedy the

The Decision concludes that the Commitments proposed
by the parties
competition
problems identified. As regards the storage/flexibility
market, the main effect of the proposed Commitments
emanates from the divestiture of the storage facility in
Lille Torup, which will have a positive impact on compe-
tition with respect to storage/flexibility in Denmark. As
regards the gas wholesale and gas retail markets, the
that
Decision concludes
release programme
in combination with the storage
offered by DONG,
divestiture,
competition
concerns identified by the Commission as relating to
these markets.

to remove

sufficient

the gas

all

is

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(5)

(6)

(7)

(8)

(9)

(10)

(11)

the notified
the Commission declares
Consequently,
transaction compatible with the common market and
the EEA Agreement,
in accordance with Articles 2(2)
and Article 8(2) of the Merger Regulation, and Article
57 of the EEA Agreement.

II. EXPLANATORY MEMORANDUM

1. THE PARTIES

DONG is the Danish state-owned gas incumbent active
in exploration, production, offshore transport and sale of
oil and natural gas, as well as storage and distribution of
natural gas. It also has minor activities related to wind
electricity generation and supply of electricity and heat.

Elsam and Energi E2 (E2) are the Danish electricity
generation incumbents in West Denmark (Elsam) and
East Denmark (E2), respectively. They are both active
in production and trading of electricity (financial and
physical) on the wholesale market and in production of
district heating. Since its acquisition of the (East Danish)
electricity retailer Nesa
in 2004, Elsam also has
substantial activities in electricity retailing to household
and business customers. Elsam and E2 have, on the one
hand, a core ownership of local authorities, and on the
other hand, substantial shareholdings by DONG and
Vattenfall (in Elsam) and by Nesa and KE (in E2).

KE and FE supply household and business customers
with electricity in the Copenhagen area. They are
currently owned by the City of Copenhagen and the
City of Frederiksberg, respectively.

2. THE OPERATION AND THE CONCENTRATION

constituting

the Decision describes

This part of
the proposed
operation,
a
concentration, by which
less
DONG acquires control of Elsam, E2, KE and FE,
certain generation assets of Elsam and E2 that will be
attributed to Vattenfall. The
acquisition by
Vattenfall constitutes a separate concentration.

asset

3. LEGAL AND REGULATORY FRAMEWORK

The Decision
framework for gas and electricity.

discusses

the

applicable

regulatory

The Danish natural gas market was first opened to
competition for the largest customers on 1 July 2000
with all customers being able to choose supplier since
2004. The onshore gas transmission network and the
transmission system operator were fully unbundled in

2004 and is today owned and operated by Energinet.dk,
an independent public corporation owned by the Danish
state. The onshore transmission network operations are
subject to regulated third party access (TPA). Storages
and the offshore pipelines connecting the fields in the
Danish part of the North Sea with mainland Denmark
are both owned by DONG. Access
to these infra-
structures is obtained by negotiated TPA. TPA rules are
supervised by the Danish Energy Regulatory Authority
(DERA), an independent supervisory body in the energy
sector.

4. RELEVANT MARKETS

A. NATURAL GAS

1. Relevant product markets

(12) With respect to the relevant product markets in the field
of gas, the Commission’s market investigation focused on
the definition of the markets for gas storage/flexibility,
gas wholesale and gas supply.

Market for gas storage and gas flexibility

(13) With regard to gas storage and/or other gas flexibility
the exact product market definition of such a

tools,
market is left open in the Decision.

(14)

The parties proposed a product market for gas flexibility
including storage in dedicated storage facilities, changes
in production, international trade, line-pack, switching to
other fuels, interruptible contracts and market hubs with
forward markets.

(15) According to the Commission, these different flexibility

tools can be divided into five groups, namely:

— storage in dedicated storage facilities,

— interruptibility or other modulation of customers’

demand, e.g. of central CHPs,

— flexible supply contracts (irrespective of whether they
are based on imports, domestic production or
secondary domestic supply contracts),

— flexible trading in gas on hubs or bilaterally (irres-
pective of whether forward looking or ad hoc),

— line-pack,

i.e.

storage

in transport pipelines by
increasing or decreasing the gas pressure in those
pipelines.

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(16)

The Commission’s market investigation showed that, for
Denmark, none of
the four flexibility alternatives to
storage in dedicated storage facilities mentioned above
are considered as fully viable or sufficiently developed
Commission
flexibility
considers that
the relevant product
market (either flexibility or storage) can remain open.

alternatives. However,
the question of

the

Market for gas wholesale supplies

(17) As regards gas wholesale supplies for Denmark,
there exists a market
gas

the
for
for Denmark, which

that
of

Decision concludes
supplies
wholesale
comprises all sales:

— irrespective of whether via the GTF, supply contracts

or other agreements,

— by physical or contractual importers (1), re-importers
(in case of turnaround gas), producers (if applicable
in the future) and traders,

— to other traders (such as supply companies) or to
central CHPs (the latter to the extent that they take
over at least some of the services regularly provided
by a supplier for delivery at the site or intend to
resell the gas),

(18)

(19)

which satisfy the needs of these customers to have access
to wholesale gas in Denmark.

The Commission’s market investigation provided strong
indications for the existence of a separate market for
wholesale supplies of natural gas.
In its reply to the
Article 6(1)(c) decision, DONG recognised ‘the existence
of gas sales and trading at the wholesale level’ and did
not contest this or the above product market definition
relating to the wholesale market in their reply to the
Statement of Objections.

The proposed transaction also has
an impact on
wholesale in Sweden. The Decision concludes that there
exists a separate market for wholesale supplies of gas
destined for consumption in Sweden. The reasons are
that the market situation and conditions for wholesale
supplies in Sweden are different from those in Denmark.

(1) In this context, the term ‘physical

is understood as all
deliveries into the Danish onshore system/transmission grid. A
Danish producer in the Danish part of the continental North Sea
shelf thus only becomes a direct participant in the Danish wholesale
market if it delivers the gas into the Danish onshore grid.

imports’

Market for supply of natural gas to central CHP
plants

(20)

The Decision considers that the supply of natural gas to
central CHP plants (i.e. large combined heat and power
plants) constitutes a separate market because supply to
central CHPs is distinct
from the wholesale market.
However, a central CHP power producer can enter the
wholesale market as a buyer or a seller and entry barriers
for wholesalers wanting to supply some segments of
retail supply to central CHPs are surmountable.

(21)

Supply to central CHPs is also distinct from other retail
supply markets, due to higher flexibility and level of
consumption, different demand patterns, prices and
that
contract
central CHPs are able to directly participate on the
wholesale market.

types, different regulation and the fact

(22)

(23)

(24)

(25)

Market(s) for supply of gas to decentral CHPs and to
large industrial customers

The Decision considers that the supply of natural gas to
decentral CHPs (i.e. small combined heat and power
plants) and the supply of natural gas to large industrial
customers constitute one or
two different product
markets.

Small business customers do not belong to this product
market because of differences
in inter alia prices,
margins, marketing and distribution channels storage
costs, market structure, switching rates and metering
requirements.

The Decision considers that supply to large industrial
customers and decentralised CHPs have some similarities
(level of gas consumption, types of gas contracts) but
also some differences (regularity of demand, different
ownership structure, customer
loyalty and switching
rates).

Market(s) for supplies of gas to households and small
businesses

there

that
exist(s) one or
The Decision considers
for non-metered customers,
two separate market(s)
i.e. customers with an annual consumption below
300 000 m3. Sales to small business customers below
300 000 m3 and household customers may thereby
either belongs to the same or
to different product
markets.

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(26) Demand and supply conditions between these two types
of customers in Denmark show many similarities (higher
gas prices, lower propensity to switch supplier, customer
portfolio management tools requirements, standardised
general offers, and importance of brand image, market
structure, storage costs and high entry barriers). There are
also a number of relevant differences (average level of
consumption, prices, costs and margins and different
marketing strategies).

(27)

The competitive assessment does not differ significantly
between these two customer groups and whether or not
supplies to households and supplies to small business
customers form different segments of the same relevant
market or two different relevant markets are therefore
left open.

Market for gas wholesale supplies

(31) DONG submitted that the relevant geographic market for
than Denmark (or
least

gas wholesale supplies
Denmark and Sweden) and also embraces at
Germany.

is wider

(32)

The market investigation provides strong indications that
the market for wholesale supplies is limited to Denmark.
The Decision concludes that Sweden is not part of the
same geographical market as Denmark;
forms a
separate market which is Swedish or Danish-Swedish in
scope since the wholesale supplies in Sweden does not
exercise a strong competitive constraint on wholesale
supplies in Denmark. Similarly,
is concluded that
Germany, the Netherlands and the United Kingdom are
not part of the same geographic market as Denmark. The
reasons are:

it

it

2. Relevant geographic markets

Market for gas storage and gas flexibility

— all gas consumed in Denmark is Danish (offshore)

gas,

(28) DONG submitted that the relevant geographic market for
gas flexibility tools is wider than Denmark and also
embraces
the
Netherlands.

northern Germany

Sweden,

and

— in 2003-05, (commercial) imports represented only

less than 12 % of total Danish consumption,

(29) However, the results of the market investigation showed
that the geographic market for storage (or flexibility) is,
irrespective of the scope of the relevant product market,
limited to Denmark. Main reasons for this conclusion
are:

— as regards transactions that generally do not affect
wholesale gas needs in Denmark (i.e.
transactions
on the Benelux, United Kingdom or Emden hubs),
prices appear
impact on
wholesale prices in Denmark,

to have an insufficient

— most flexibility tools are available only on a national

level,

— cross-border flexibility is only available in the form of
in Sweden the storage
physical storage, however
capacity is very small
(Sweden depends almost
entirely on Danish storage facilities) and the usage
of storage facilities in Germany is limited due to
the longer transport distances and higher transport
costs. During the Commission’s market investigation,
doubts were expressed concerning the possibility of
storage abroad,

— the parties themselves use local storage facilities for
their operations in the Netherlands and Germany.

(33)

(30) As regards the Swedish market for storage/other flexi-
bility tools, the Decision concludes that the market is
either Swedish in scope or Danish-Swedish.

— the different wholesale players

countries mentioned
different market shares in these countries,

above

have

in the different
considerable

— the market

investigation shows

that Danish gas
customers have little knowledge about wholesale
prices in Germany, and import of gas is considered
a weak substitute to purchasing gas on wholesale
level in Denmark,

— wholesale gas suppliers wishing to import gas from
Germany to Denmark face significant transport costs,
capacity constraints and administrative obstacles.

In its reply to the Article 6(1) (c) decision, DONG argued
that gas deliveries at the German side of the Danish
entry/exit point at Ellund belong to the Danish gas
wholesale market. On the basis of the results of the
market investigation, the Decision leaves open whether
these deliveries should be included in the geographic
scope of the Danish gas wholesale supply market.

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Market for the supply of natural gas to central CHPs

(34)

The market for the supply of natural gas to central CHP
plants is likely to be national in scope and may at most
include Denmark and Sweden since it cannot be wider
the wholesale market.
than the geographic scope of
Moreover, only parts of the supply needed by central
CHPs can be sourced from neighbouring countries.

Market(s) for supply of gas to decentralised CHPs
and large industrial customers

(35)

(36)

The market or markets for the supply of natural gas to
decentralised CHPs and large industrial customers is/are
national
imports.
in scope since there are no direct
Moreover,
the market structures are clearly different
between the neighbouring countries. The existence of
Denmark,
substantial
Germany, Sweden and the Netherlands further confirms
the existence of national markets.

differences

between

price

Market(s) for supplies of gas to households and small
businesses

The Decision considers that the market(s) for supply to
businesses and household customers in Denmark is not
wider than national and possibly still regional in scope.
The question of whether the market(s) is/are national or
regional can be left open. On the one hand, sales on this
market require a national sales- and service office and all
suppliers to non-metering customers in Denmark are
Danish, Danish companies and there exist large price
differences between national markets. On the other
hand, only less than 1 % of the customers have so far
distribution
decided
companies therefore still have very large market shares
in their respective areas and prices to end consumers are
different in the three regional areas. The existence of
large differences
share as well as price
differences between regions would normally be indi-
cations that regional markets are not integrated.

supplier. Regional

to change

in market

3. Conclusion on relevant markets in the natural gas

sector

(37)

The Decision considers
markets exist:

that

the following relevant

1. the Danish market
for
Danish market
Swedish market
Swedish market
(Swedish or alternatively Swedish-Danish in scope);

for storage or alternatively the
the
flexibility of natural gas;
storage or alternatively the
gas

flexibility of natural

for
for

2. the market for wholesale of natural gas for Denmark
(Danish in scope); the market for wholesale of natural
gas for Sweden (Swedish or alternatively Swedish-
Danish in scope;

3. the Danish market for the supply of natural gas to
central CHPs; the Swedish market for the supply of
natural gas to central CHPs (Swedish in scope or
Swedish-Danish scope);

4. the market or markets for the supply of natural gas to
large industrial customers and to decentralised CHPs
(Danish in scope);

5. the market or markets for the supply of natural gas to
small business customers and to households (Danish
or regional in scope).

B. ELECTRICITY

1. Relevant product markets

Generation and wholesale of physical electricity;
Ancillary services

(38) An important part of

the sales and purchases of
wholesale electricity in the Nordic area is conducted via
the Nordic electricity power exchange Nord Pool Spot
ASA (Nord Pool). In addition to these Nord Pool-based
forms of trading of physical electricity at wholesale level,
producers/traders and customers also engage in bilateral
contracts of physical wholesale electricity.

(39)

The immediate customers of ancillary services are TSOs,
who are responsible for maintaining the balance in the
grid and for securing supply in emergency situations. The
Commission’s market investigation has led to clear indi-
cations that ancillary services/system services are not
easily substitutable with other electricity supply at the
wholesale level. Moreover, an operator’s share of regu-
lating power may vary significantly over time without
any apparent relation to its position on the market for
electricity production.

(40) However, the Decision considers that the precise delin-
eation of this market/these markets can be left open.
Bilateral supplies to customers without a direct access
to Nord Pool may or may not constitute a separate
product market and the same can be said for ancillary
services.

Financial derivatives of electricity

(41)

trading of
trading of

risk while the physical market

The Decision considers a separate market for financial
electricity, since fundamentally the financial market is
is
about
about
consumption and
therefore not
fully substitutable. Whether the distinct
financial product of CfDs (or contracts for difference)
belongs to the same market or to a separate market is
left open.

electricity

for

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Electricity retail

3. Conclusion on relevant markets in electricity

(42)

The Decision considers separate markets for supplies to
customers with hourly metering requirements and one
for
customers without metering requirements. This
distinction was clearly confirmed by the market investi-
gation. These customer groups pay different prices,
consume different products and purchase in different
ways.

2. Relevant geographic markets

Wholesale of physical electricity

(43)

The Decision considers that the competitive effects of the
merger should be assessed on separate East Danish/West
Danish Nord Pool price areas or on a combination of the
two areas plus Sweden, since the parties’ Nordic activities
are almost exclusively limited to Denmark. If the concen-
tration does not lead to negative effects on competition
in such combinations of areas then it cannot lead to
negative effects in any wider price area.

(44) All other geographic market definition issues for the
wholesale electricity market with regard to the current
operation are left open.

Ancillary services

(45)

The Decision regards that ancillary services are national
in scope, since these are dependent on immediate and
reliable availability within a certain price area and since
congestion of interconnectors exist.

Financial derivatives of electricity

the market

(46) As regards financial derivatives of electricity, the Decision
considers
least pan-Nordic as
to be at
financial derivatives of electricity trading takes place on
Nord Pool, while the CfDs could comprise the particular
trading in these
since companies
price area only,
products will mainly be the wholesale suppliers and
customers in these very price areas.

(48)

The Decision therefore defines the following electricity
markets:

1. wholesale of electricity (being East Danish and West

Danish respectively or wider);

2. possibly, bilateral wholesales to customers not having
(being East Danish and West

access to Nord Pool
Danish respectively);

3. possibly, ancillary services (being East Danish and

West Danish respectively);

4. financial derivatives of electricity (encompassing the

Nord Pool area if excluding CfDs);

5. possibly CfDs (being East Danish and West Danish

respectively);

6. electricity sales to metered (business) customers (being

Danish-national);

7. electricity

household)
Danish-regional).

sales
customers

to non-metered

(predominantly
(being Danish-national or

C. OTHER MARKETS

(49) A number of other markets are affected by the proposed
concentration but there is no negative impact on compe-
tition, either due to low market shares or no geo-
graphical overlaps: District heating (local), Fly ash
production (regional scope left open) and CO2 trading
(likely EU-wide).

5. COMPETITIVE ASSESSMENT

PRELIMINARY REMARK ON MINORITY SHAREHOLDINGS

(50)

The Decision examines the argument set out by DONG
concerning the effect of pre-merger links between the
merging parties and between the merging parties and
third parties but finds that, in any event, a consideration
of any such effect cannot offset the negative effects of
the merger.

Electricity retail

A. NATURAL GAS

(47)

In electricity retail markets, the Decision considers that the
market for metered customers is national, while for non-
metered it is national-regional. There is no direct entry
by
non-metered
companies,
customers have largely remained with their local USO
supplier.

foreign

supply

and

1. Market for gas storage and gas flexibility

(51)

the Commission has

Based on the market investigation undertaken in this
case,
concluded that DONG
currently is dominant in the Danish market for storage/
flexibility.

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(52)

(53)

(54)

to other gas activities,

The Decision considers that access to storage/flexibility is
a necessary complement
the
market for storage/flexibility is considered adjacent to
other gas markets. Even though two separate legal
entities within DONG are responsible respectively for
storage and trading of gas, the Commission considers
that both these activities are pursued with the joint
aim of increasing the profitability of the DONG group,
and has analysed the effect on the Danish market for
storage/flexibility against this background.

Therefore, the Decision considers that the acquisition of
E2 and Elsam as the main independent sources of flexi-
bility in Denmark will give DONG the ability and
incentive to reduce its storage needs by replacing the
use of its own storage facilities by the use of E2 and
Elsam as flexibility sources. At the same time, the flexi-
bility alternatives available to competing gas suppliers
will be reduced. As a result, and due to the way the
Danish storage tariffs apply, other gas suppliers’ storage
costs will
increase and their ability to exercise com-
petitive pressure on DONG will thereby decrease.

(57)

The Decision concludes that DONG is dominant on the
Danish market for gas wholesale supplies, considering
the company’s market share was [80-90 %] * in
that
2004 (1). The Commission analysed potential competitive
constraints on DONG’s dominant position from the
following five sources:

— operators in the Danish offshore area,

— imports
pipeline,

from Germany south of

the DEUDAN

— turnaround of gas at Ellund,

— a liquid Danish wholesale market, and

— new pipeline capacity or other import facilities.

these reasons,

the Decision concludes

For
the
to
operation would lead to a significant
effective competition on the possible Danish market for
storage or on the possible Danish market for storage/
flexibility in particular
through the strengthening of
DONG’s dominant position on such markets.

impediment

that

(58)

(59)

(55) As regards the Swedish storage/flexibility market,

the
Decision concludes that the finding of potential harm
in Denmark may in principle be extended to Sweden,
but that a detailed assessment of the particular features
of the Swedish market is unnecessary considering that
the overall assessment of the transaction in independent
thereof.

2. Market for gas wholesale supplies

beyond

supplies

gas wholesale

(56) During the investigation, the Commission and DONG
have taken different views as regards the relevance of
[…] (*).
analysing
DONG questioned the relevance of looking beyond a
[…] * years horizon. According to the Commission, the
gas market is signified by long-term investments in infra-
structure and long-term supply contracts, which justifies
including a time-horizon beyond […] *.
an analysis
that even in the
However,
absence of any consideration of
the market situation
beyond […] *,
the merger will have significant anti-
competitive
supplies,
effects on Danish wholesale
through the elimination of the BGI project’s constraining
impact, and the fact that entry decisions of competitors
will be guided by the beginning in 2008 of negotiations
of supply contracts with Elsam and E2.

the Decision concludes

concludes

competitive
The Decision
constraints are weak or not sufficiently certain to in
the short
term constitute an effective constraint on
DONG’s market position.

these

that

The Decision thereafter examines whether the transaction
lead to a strengthening of DONG’s dominant
will
position by the removal of actual and/or potential
competition. As regards the E2’s and Elsam’s commercial
interest
to become active players in the Danish gas
wholesale market, DONG disputes that E2 and Elsam
constitute potential competitors and argues that
they
are not the most important competitive constraints on
DONG.

(60) According to the Commission, it is sufficient that E2 and
Elsam constitute important competitive constraints (and
not necessarily the most
the removal of
which would lead to competition concerns.

important),

(61)

competitor

The Commission’s
investigation and the Decision
conclude that the proposed concentration will remove
E2 as an actual competitor, and Elsam as a credible
to DONG. The Commission’s
potential
analysis of
the five potential competitive constraints
mentioned in recital 57 above will not change this
conclusion. Moreover,
that
Vattenfall’s acquisition of a small share of E2’s and
Elsam’s gas-fired power plants will not be sufficient to
outweigh the loss of competitive pressure caused by the
E2’s and Elsam’s integration in the DONG group.

the Decision concludes

(*) Business secret.

(1) As is expected to be [80-90 %] * in the first half of 2005.

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(62)

(63)

(64)

(65)

the Decision
In addition to these horizontal effects,
concludes that the transaction will lead to customer fore-
closure, and as a result, to a significant impediment to
effective competition, due to a vertical
integration of
DONG with E2 and Elsam, which account for about
[20-30 %] * of total Danish consumption.
It will thus
for DONG’s competitors to enter
be more difficult
Danish gas markets, both as wholesale suppliers and as
suppliers of final customers, thereby raising barriers to
entry to these markets.

(67)

3. The market for the supply of natural gas to central

CHPs

The Decision considers that no customer foreclosure or
input foreclosure can arise on the markets for supply of
natural gas to central CHPs in Denmark and Sweden,
since a) at least until 2009 no central CHP customers
would suffer harm on either the Danish or the Swedish
markets for supply to central CHPs, and, b) CHPs would
the
post 2009 be protected if
wholesale market is reinforced through the gas release
program proposed by the parties.

the functioning of

The parties submitted that so far Elsam has sourced from
third parties only to a limited extent, since it has only
engaged in some swapping and short-term purchasing
agreements. The Commission, however, considers that
supplies to Elsam by DONG’s rivals would at
least
have constituted a potential constraint on DONG’s
behaviour.

The Decision concludes that even if the foreclosure effect
was limited to the foreclosure of demand from E2, such
strengthen DONG’s
foreclosure would
significantly
dominant position on the Danish wholesale market
through creating further disincentives to third parties
entering this market on a significant
scale. This is
because nearly all independent (non-captive) third party
demand for Denmark has so far arisen through E2. The
proposed merger will as a result raise entry barriers to
the Danish wholesale market because it eliminates a
company that has purchased important quantities of
natural gas on the wholesale market with a view both
of using it internally and of supplying natural gas to
other users.

The Decision concludes
the proposed concentration
removes significant competitive constraints to DONG,
on the Danish gas wholesale market. Given DONG’s
entrenched dominant position on such a market, the
proposed transaction is likely to lead to a significant
in particular
impediment
through
dominant
position.

of DONG’s

strengthening

competition,

to effective

the

it

is not

(68) As regards potential competition, the Decision concludes
that
likely that E2 and/or Elsam could be
considered potential entrants on the market for supply
to central CHPs since it would seem unlikely that other
central CHPs would be willing to satisfy its gas needs by
supplies from its direct competitors.

(69)

The Decision therefore considers that the concentration
does not lead to a significant impediment of effective
competition on the markets
for supplies to central
CHPs in neither Denmark nor Sweden.

4. Market(s) for supplies to industrial customers and

decentral CHPs

(70)

The Decision finds that DONG is dominant and will
in the foreseeable future with a
remain dominant
market share of
[60-70 %] * in 2004, which is the
latest year with reliable market share data. There is no
reason to believe that DONG’s market share would fall
below 50 % in the foreseeable future.

(71) DONG’s dominance upstream in wholesale,

storage,
offshore gas and import pipes further supports DONG’s
position in this market/these markets of supply to large
business customers and decentralised CHPs, since storage
facilities and access to gas are important competitive
parameters in the context of supplies to these customer
groups.

(66) As regards gas wholesale supplies in Sweden, DONG has
a very strong position also on that market (1). The
Decision leaves open the question as
to whether
DONG is in a position of single or joint dominance in
a Swedish or Danish-Swedish wholesale supplies market,
since any harmful effects on any of these markets would
be derived from a harmful effect the operation would
have on the wholesale market for Denmark.

(1) At least [45-55 %] * according to DONG sales strategy for 2005,
and [70-80 %] * in 2003, according to a recent decision (556/2004)
by the Swedish Competition Authority.

(72)

(73)

competitors

Furthermore, DONG’s
challenge
DONG’s dominance, since HNG/MN and Statoil Gazelle
are small companies, since HNG/MN is a financially weak
competitor and since there exist strong ties between
DONG and HNG/MN.

cannot

E.ON and Shell both have a very modest market share in
the Danish market(s)
to large business
customers and decentralised CHPs and E.ON is likely to
focus its Nordic efforts on the Swedish market.

sales

for

L 133/32

EN

Official Journal of the European Union

25.5.2007

(74)

(75)

(76)

(77)

(78)

The Decision also finds other indications of DONG’s
entrenched dominance pre-merger: DONG clearly has
the lowest switching rate among the large players on
the market. DONG is the best placed company to offer
dual fuel products and DONG has been able to develop
relatively close relations with a number of decentralised
CHPs.

that

The Decision finds
the proposed operation
strengthens DONG’s dominance due to the raising of
entry barriers and due to the elimination of potential
competition.

The proposed operation raises entry barriers because it
will be more difficult for other players to attain critical
size in gas supply if some 20 % of total Danish gas
consumption is removed from the market. Moreover,
DONG’s already privileged access to decentral CHPs
will be further strengthened as a consequence of the
merger. The merger also raises the risk of gas storage
input foreclosure or raising of rivals’ costs in connection
with storage, which will further increase entry barriers.
Furthermore, the concentration is likely to raise entry
barriers on wholesale markets thereby making it more
for DONG’s competitors to source supplies
difficult
competitively. DONG will post merger also be in a
privileged position to offer dual fuel products, whereas
other competitors will find it more difficult to match
DONG’s offer.

proposed

The
strengthens
DONG’s dominance due to elimination of the potential
competitors Elsam, E2, Nesa and KE.

furthermore

operation

E2 and Elsam both have access to large quantities of
natural gas at competitive prices. They also have access
to storage and means of flexibility. Moreover, they have
the necessary ‘energy’ brand. A clear majority of
respondents to the Commission’s market investigation
has stated that Elsam and E2 could sell on extra quan-
tities of gas to them. Finally, the Commission has found
strong evidence
and
intentions by E2, who has already submitted offers to
wholesale regional supply companies in Sweden and
Denmark in 2003 and 2004.

such entry opportunities

for

(79) NESA and KE have strong energy brands and can achieve
cost synergies and increased customer loyalty by sales of
duel fuel. They have access to a large customer base of
industrial customers. Also DONG and Statoil Gazelle
considered KE, Elsam and Energi E2 potential com-
petitors on Danish gas markets.

(80)

these reasons,

For
the
proposed operation will lead to a significant impediment
of effective competition, in particular as a result of the

the Decision concludes

that

creation or strengthening of dominant positions on the
market or markets of the supply of natural gas to large
business customers and decentralised CHPs.

5. Market(s) for supplies of gas to households and

small businesses

(81)

in two
The Decision finds that DONG is dominant
regional areas with a market share above [90-100 %] *
and that
this dominance is reinforced by high entry
barriers, DONG’s control over storages and access to
offshore gas as well as its dominant position on the
wholesale market.

(82) On the alternative assumption of a national market,
DONG and HNG/MN are considered joint dominant
[25-35 %] * and [55-65 %] *
shares of
with market
strong ties between these
respectively. There
exist
is very transparent and any
companies. The market
deviation from oligopolistic behaviour could therefore
be detected easily. The product
is very homogenous
and facilitates tacit coordination. There are very high
in high entry
customer
retaliation
barriers. Moreover,
mechanisms against a deviating oligopolist and a high
joint interest in maintaining the status quo.

loyalty rates which result
there

effective

are

(83)

The Decision finds that DONG’s dominance will be
strengthened by raising entry barriers and, to a certain
extent, by elimination of potential competition.

(84)

(85)

The concentration will raise entry barriers due to higher
storage cost and to higher difficulties of achieving critical
size and reaching the economies of scale and scope
necessary for entry to be financially viable. Furthermore,
the operation removes larger customers on different
markets whose flexibility could be balanced against the
flexibility requirements of household and small business
customers. Finally, the likely reduction of liquidity on the
Danish wholesale gas market
increases the ability of
DONG to foreclose access to wholesale gas to its com-
petitors.

The concentration will eliminate some potential compe-
tition from KE and to NESA, who are electricity retailers,
both with a base in the greater Copenhagen area. They
have already sales offices, large sales forces, IT equipment
and billing systems in place. They have large customer
portfolios, which could be built upon with the aim to
enter gas retail markets. Both companies also have
considerable brand strength both at a national and es-
pecially at a regional level. Thus, NESA and KE do not
face the high barriers to entry that most other entrants
would meet. […] *.

25.5.2007

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Official Journal of the European Union

L 133/33

(86) On the other hand, many of KE’s customers already will
have its energy requirements for cooking covered by city
gas and their heating requirements covered by district
heating. It also has to be taken into account that the
bulk of NESA’s and KE’s electricity customer base
could only have been used to compete with HNG/MN
whose gas distribution areas geographically overlap with
NESA and KE, and not with DONG.

1. Electricity wholesale

(91)

The Decision finds, that prima facie Elsam and E2 hold a
dominant position in their respective Nord Pool areas in
electricity wholesale whenever these areas are isolated
from other Nord Pool areas, since the effective constraint
exerted by intra-area windmills and decentral CHP’s are
low.

(87)

(88)

(89)

The Decision also acknowledges that other electricity
supply companies could enter the market for supply of
gas to small business and household customers, but
concludes that KE and NESA have a special position
when it comes to access to gas, that would be difficult
for other electricity companies to duplicate.

that

these reasons,

the Decision concludes

For
the
proposed merger will significantly impede competition
on the market or markets for the supply of gas to
irrespective
households and small business customers,
of whether these markets are/this market is defined as
regional or as national,
through the
strengthening of a dominant position.

in particular

6. Conclusion on the assessment of the natural gas
markets prior to consideration of modifications to
the notified concentration

The Decision concludes that the transaction leads to a
significant
in
particular
strengthening of dominant
positions on the following product markets:

impediment of
through the

competition,

effective

— supply of wholesale gas for Denmark (and potentially

also for Sweden),

and West Denmark, which create
to the area incumbents,
substantially.

(92) However, the horizontal effects of the proposed trans-
action will most likely be substantially surpassed by the
loss of market share due to the Vattenfall conditionally
linked divestitures of power plants to Vattenfall in both
East
viable
a
reducing their
competitor
market
also
shares
concludes that
intentions by Elsam and E2 to enter
into each other’s territories have not been established
and that DONG had rejected to enter into electricity
generation via a gas-fired power plant. Therefore the
Decision concludes that any potential horizontal effects
are by far outweighed by the more
certain and
immediate positive effect of Vattenfall’s entry.

The Decision

for

in order

simulation confirmed that

(93) As to vertical effects, the Decision finds that DONG is
unlikely to raise rivals’ costs (gas as input) post merger. A
model
the
reduction in output
to be of any importance very
significant
increases in gas prices would be required.
Such increases based on merger-related vertical effects
would not be realistic in light of
the competitive
constrains which, despite its dominant position, would
nevertheless exist on DONG after
the merger. This
conclusion is reinforced by the remedies offered by
DONG which will increase the availability of alternative
sources of gas to decentral CHPs after
the merger.
Furthermore, even if
the merged entity post merger
had an incentive to seek to increase prices of gas to
decentral CHPs,
it is unlikely that this would translate
into higher electricity prices in light of the increased
competition in Denmark East and West brought about
by the divestiture of the power plants to Vattenfall.

— gas storage or gas flexibility (irrespective of whether

only for Denmark or also for Sweden),

— supply of gas

to large business customers and
decentral CHPs, as one or two markets, in Denmark,

(94) DONG is also unlikely in the future to be able to exercise
any direct
influence on decentral CHPs due to the
commitment by Elsam to the Danish Competition
Authority in March 2004 in connection with the acqui-
sition by Elsam of Nesa, where Elsam and Nesa
undertook to divest all
their shares in decentral gas-
fired CHPs.

— supply of gas to small business customers and/or
households, as one or two markets, in Denmark.

(95)

B. ELECTRICITY

(90)

The Decision finds that the concentration does not give
rise to competition concerns on the electricity market.

Interconnector,

the Great Belt

The effect of the merger on the otherwise positive impact
of
connecting East
Denmark and West Denmark and expected for 2010 is
also examined. It is concluded that in the absence of the
merger, the constraint that could be caused through this
probably 600 MW interconnector is in any event less
than the constraint caused by the entry of Vattenfall in
both areas. This has also been confirmed by a model
simulation.

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Official Journal of the European Union

25.5.2007

(96)

These considerations and findings concerning horizontal
and vertical effects of the proposed merger also apply to
bilateral wholesales of electricity to customers within
both East and West Denmark assuming a separate
for wholesale customers who may not have
market
direct access to the Nord Pool wholesale market.

(97)

In a wider Nord Pool context,
the parties will have
market shares below 10 % even on a market encom-
passing only Sweden and both parts of Denmark.

5. Retail supply of electricity to small standard load

profile customers

(102) The operation will also lead to some market share
overlaps in the market for retail supply of electricity to
small customers. The competitive landscape in this
market
in Denmark is quite fragmented with only a
small number of household customers having so far
local supplier. On a
switched from their incumbent
the
national, Danish, market DONG will become
largest company, albeit with a limited market share of
around [25-30 %] *.

2. Ancillary services

(98)

The Decision finds that pre-merger Elsam and E2 had to
face little competition in their respective areas, whereas
post-merger DONG will be faced, in each area, with a
serious
competitor, namely Vattenfall. The merger,
therefore, will not lead to competition problem on the
possible markets for ancillary services in East Denmark
and West Denmark.

3. Financial derivatives of electricity

(99) On a Nordic market for trading in financial derivatives of
electricity the merging parties have a combined market
share of ≤ 10 %. This small market share dispels all
concerns on such a market.

(100) Regarding potential area markets for CfDs for East and
West Denmark, E2 and Elsam are clearly the major
it is
sellers of CfDs in their respective areas. However,
to be expected that the divestment of generation assets
to Vattenfall will have the effect of introducing Vattenfall
as a major seller of CfDs in both East and West
Denmark.

4. Retail supply of electricity to business customers

(101) The Decision finds that that the current competition level
in the Danish market for electricity supplies to metered
is high. The merged entity will have a
customers
combined market
the
merger, the merged entity will largely close the gap up
to the number one player, EnergiDanmark. Furthermore
a number of other competitors are considered viable
alternatives by customers.

[20-30 %] *. After

share of

(103) Even though NESA and KE were among the more
important
have
switched, other competitors have comparable customer
acquisition rates.

to which

companies

customers

(104) On the assumption of regional markets, the Decision
finds that the operation would not lead to a significant
strengthening of Nesa’s, KE’s and FE’s positions in their
respective incumbency areas
since third party com-
petitors such as OK and EnergiDanmark are as well
placed competitors to the area incumbents as are the
other parties to the merger.

6. Conclusion on competitive assessment for electricity

markets

(105) The Decision finds that the concentration does not lead
to a significant impediment to effective competition, in
particular as a result of the creation or strengthening of a
dominant position on either any possible affected market
for electricity wholesale, ancillary services, financial deri-
vatives of electricity, retail supply to business customers
or electricity supply to small customers.

6. COMMITMENTS

A. DESCRIPTION OF THE COMMITMENTS

1. Storage divestiture

(106) With a view to addressing the competition concerns on
the storage/flexibility market, DONG has submitted a
to divest before 1 May 2007 its larger
commitment
gas storage facility in Lille Torup in Jutland. Only the
purchaser shall be entitled to sell storage capacity in the
Lille Torup storage facility for
the gas storage year
2007/08 which runs from 1 May 2007 to 30 April
2008. DONG commits not to acquire, for a period of
10 years from closing of the sale to the purchaser, direct
or indirect
the
storage unless the Commission has previously accepted
it.

influence over the whole or part of

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Official Journal of the European Union

L 133/35

2. Gas Release Programme

(107) With a view to addressing the competition concerns put
forward on wholesale markets, DONG has submitted, as
a commitment, a Gas Release Programme in order to
make available to third parties natural gas in Denmark.
The amount of gas to be released will be 400 mcm per
year, (a total of 2 400 mcm), to be auctioned in the years
2006 through 2011 for delivery in the gas years
following each auction. The volumes correspond to
approximately 10 % of
total Danish consumption in
2005. In the event that market conditions change sig-
nificantly, DONG may, under certain conditions, apply to
the Commission to have the Gas Release Programme
terminated with respect to the two last auctions. The
Gas Release Programme foresees a two-step auction
process: in the ‘Primary Auction’, DONG will make gas
available at the virtual trading point/hub in Denmark
and, as in a swap, successful bidders will make the
same volume of gas available to DONG at one of four
specified gas hubs in north-western Europe. Any quan-
tities not sold in the Primary Auction, will be sold in a
traditional gas release auction to be held later in the
the Commitments foresee a
same year.
customer
release clause according to which existing
direct customers of DONG which participate in the
auction process or which purchase gas from a trader/
wholesaler who was awarded lots in the auction, are
entitled to reduce their contractual purchase obligation
vis-à-vis DONG.

In addition,

B. ASSESSMENT OF THE COMMITMENTS SUBMITTED

1. Effect of the proposed commitments on the storage/

flexibility market

(108) The main effect of the proposed Commitments on the
storage/flexibility market emanates from the divestiture
of the storage facility in Lille Torup.
In addition, the
increase the liquidity of
Gas Release Programme will
the Danish wholesale market and thereby also provide
new sources of flexibility.

capacity of

(109) The divestiture of the larger of the two Danish storage
facilities which has
approximately
a
400 mcm with no capacity reservations exceeding one
year, will result in increased competition on this market,
whether regarded as a storage market or on a wider
market for flexibility. These storage/flexibility volumes
the Danish storage
amount
the
capacity and thereby for a very large part of
overall flexibility available in Denmark.

to more than 57 % of

(110) The divestiture of

the Lille Torup storage facility is
generally viewed by market participants as having a
positive impact on competition with respect to storage/
flexibility in Denmark.

(111) A positive impact on flexibility available in Denmark will
also emanate from the Gas Release Programme, which
thus complements the flexibility offered to the market by
the Lille Torup storage facility.

(112) Both elements of

i.e.

the Commitments,

the storage
divestiture and the Gas Release Programme, will also
have a positive impact on the Swedish markets. Compe-
tition between DONG and the future storage operator of
Lille Torup will also benefit Swedish storage customers.
the Gas Release
The same applies to the effects of
Programme.

2. Effect

of

the proposed

commitments

on the

wholesale market for natural gas

(113) The Commission has concluded that

the gas release
programme offered by DONG, in combination with the
storage divestiture, is sufficient to remove all the compe-
tition concerns identified by the Commission as relating
to the wholesale market.

(114) As to the gas release programme, the quantities offered
of 400 mcm per year to be swapped or sold via either
the primary or the secondary auction make up approxi-
mately 10 % of Danish demand.

(115) First, with regard to customer foreclosure, these quan-
tities will,
in combination with the customer release
provision, compensate for the volumes which E2 has
sourced in the past years on a short-term basis both
inside and outside Denmark, and which accounted for
approximately 5 % of the Danish demand. The released
quantities also compensate for any additional volumes
which would potentially have been purchased by both
Elsam and E2 prior to the expiry of their long-term
supply contracts with DONG in 2009.

(116) The quantities will, secondly, compensate for the elim-
ination of potential competition by Elsam and especially
E2. It is, however, difficult to establish with sufficient
certainty what quantities would have been sold by
these companies in the foreseeable future. However,
imports by and for E2 plus all competitors’ market
shares (except
independent
competition to DONG taken together), amounted to
about 10 % of Danish demand in 2004.

for […] *)

(i.e. all

together

L 133/36

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Official Journal of the European Union

25.5.2007

(117)

It should also be considered that these quantities will
include flexibility provisions that will make this gas
attractive for all purposes of
the Danish wholesale
market.

(118) An element of specific importance is the customer
release provision which provides an incentive for the
purchasers of this gas to use it in Denmark, facilitates
entry, and addresses the customer foreclosure concern.

(119) Regarding the duration and volume of the gas release
programme a large number of market participants have
qualified this as sufficient
for offsetting the harmful
effects of the merger on the Danish wholesale market.

(120) Also the storage divestiture remedy will have a beneficial
effect on the Danish wholesale market. This is because
capacity inde-
access
pendent from DONG is an essential facilitator of third
parties’ wholesale operations in Denmark.

to non-discriminatory storage

3. Effect of the proposed commitments on natural gas

retail markets

Market(s) for supplies to industrial customers and
decentral CHPs and Market(s) for supplies to small
businesses and households

(i) The raising of entry barriers (vertical problems)

(121) The Decision finds that

the gas release programme
remedies any concerns relating to the raising of entry
barriers on these markets.

(122) More specifically, the Gas Release Programme addresses
the concern relating to customer foreclosure effect and
the attainment of critical size,
through the customer
release part of the programme. The 400 mcm volume
auctioned amounts to 17 % of the market for supplies to
industrial customers and decentral CHPs and 45 % of the
market for supplies to small businesses and households.

(124) Any concerns relating to the removal of flexibility of
central CHPs as a balancing possibility to the flexibility
foreclosure, are
requirements of suppliers and input
the Gas
remedied by the
the
Release Programme as well as the divestiture of
Lille Torup storage facility, which introduces competition
between the two Danish storages.

flexibility provisions of

(125) The Decision therefore concludes that as an effect of the
undertakings submitted entry barriers will not be higher
as compared to the pre-merger situation.

(ii) Elimination of potential competition

(126) The Decision considers that the overall lowering of entry
barriers on these markets will have the effect of offsetting
the loss of potential competition on these markets.

(127) Regarding the Gas Release Programme

is

this

in
particular achieved in two ways. First,
the improved
access to gas under the Gas Release Program with the
associated flexibility facilitates entry by other potential
competitors. Secondly, the customer release mechanism
ensures that potential competitors wanting to enter the
Danish gas market(s) who have acquired gas through the
Release Programme, will have comparatively easy access
to customers.

(128) Second, the storage divestiture remedy will facilitate entry
by introducing competition between the two Danish
storages, eliminating the risk of input foreclosure and
strengthening overall confidence in non-discriminatory
access to storage facilities.

7. CONCLUSION

(129) The Decision concludes that the proposed concentration
with the submitted commitments will not significantly
impede effective competition in the common market or
in a substantial part of it, in particular as a result of the
creation or strengthening of a dominant position.

(123) The annual amount of gas to be released will have an
important impact on liquidity on the Danish wholesale
facilitate the possibility of com-
gas market and will
petitors which are active, or wishing to become active,
on these markets to offer dual fuel natural gas/electricity
supplies in competition with DONG.

(130) Consequently,

the notified
the Commission declares
transaction compatible with the common market and
the EEA Agreement,
in accordance with Articles 2(2)
and Article 8(2) of the Merger Regulation, and Article
57 of the EEA Agreement.