CELEX: 32015M7745
Language: en
Date: 2015-11-23 00:00:00
Title: Commission Decision of 23/11/2015 declaring a concentration to be compatible with the common market (Case No COMP/M.7745 - FORTUM / LIETUVOS ENERGIJA / JV) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

|[pic]                             |EUROPEAN COMMISSION                                                                                      |

Brussels, 23.11.2015
C(2015) 8344 final

|In the published version of this decision, some information |           |Public version                                                 |
|has been omitted pursuant to Article 17(2) of Council       |           |                                                               |
|Regulation (EC) No 139/2004 concerning non-disclosure of    |           |                                                               |
|business secrets and other confidential information. The    |           |                                                               |
|omissions are shown thus […]. Where possible the information|           |                                                               |
|omitted has been replaced by ranges of figures or a general |           |                                                               |
|description.                                                |           |                                                               |
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|                                                            |           |MERGER PROCEDURE                                               |

|To the notifying parties:                                              |                                                                       |

Dear Sir/Madam,

Subject:    Case M.7745 Fortum/Lietuvos Energija/ JV
Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/2004[1] and Article 57 of the Agreement  on  the  European  Economic
Area[2]

 1) On 16 October 2015, the European Commission received a notification of a proposed concentration pursuant to Article 4 of Council  Regulation
    (EC) No 139/2004 by which UAB Fortum Heat Lietuva ('Fortum Heat' of Lithuania), controlled by Fortum Corporation ('Fortum' of  Finland)  and
    UAB Lietuvos Energija ('LE' of Lithuania) will acquire within the meaning of Article 3(1)(b) and 3(4) of the Merger Regulation joint control
    over UAB Kauno Kogeneracinė Jėgainė (the 'JV' of Lithuania) by way of purchase of shares in a newly created  company  constituting  a  joint
    venture (the 'Transaction') [3]. Fortum and LE are referred hereinafter as the "Notifying Parties", the Notifying Parties  and  the  JV  are
    referred hereinafter as the "Parties".

       THE PARTIES

 2) LE is a Lithuanian State owned company primarily active in the Baltic region. LE's core business covers (i) power and  heat  generation  and
    supply, (ii) electricity trade and distribution, (iii) gas trade and distribution.

 3) Fortum is a Finnish-based energy group, primarily active in the Nordic countries and other areas of the Baltic, whose core business  is  the
    generation and the sale of electricity and heat, as well as energy-related services. The parent company of the  Fortum  group  is  a  public
    company owned by the Finnish State.

 4) The JV is a newly created undertaking, which will be jointly controlled by Fortum and LE.

 5) Pending the implementation of the JV project, LE has incorporated and holds 100% of the shares in "UAB Kauno kogeneracine jegaine".  The  JV
    will be created through Fortum acquiring a participating interest ranging between 44 % and 49 % of this latter company share capital. The JV
    will develop, construct and operate a waste-to-energy combined heat power plant ('CHP plant') in Kaunas, Lithuania.

       THE CONCENTRATION

 6) The Transaction consists of a purchase of shares in a newly created JV. Currently, LE owns the  entire  issued  share  capital  of  the  JV.
    Pursuant to the co-operation agreement signed on 20 May 2015, Fortum will purchase a participating interest in the JV ranging between 44 % -
    49 % of the issued share capital. In addition, a third party […] may also acquire a minority stake in the JV (up to 5 %).

    Joint-control

 7) The Transaction leads to an acquisition of joint control over the JV by LE and Fortum within the meaning of Article 3(1)(b)  of  the  Merger
    Regulation for the following reasons.

 8) First, LE will have a participating interest in the JV equal to 51% of the issued share capital, while  Fortum  will  have  a  participating
    interest in the JV ranging from 44% to 49% of the issued share capital. Finally, […] may have a participating interest in the JV up to 5% of
    the issued share capital.

 9) Second, under a shareholders’ agreement to be entered into between LE  and  Fortum,  the  key  strategic  decisions  relating  to  the  JV’s
    management will require the consent of both LE and Fortum.  Particularly, decisions on investments, approval of budget,  business  plan  and
    essential transactions will need to be adopted with the consent of both LE and Fortum.

10) Third, […]’s consent will not be required for the adoption of any decision and it  will  also  not  have  the  right  to  interfere  in  the
    management of the JV. The minority share in the JV will not  grant  […]  any  specific  rights,  save  for  typical  rights  of  a  minority
    shareholder.

11)  In light of all the above, the Commission takes the view that Fortum and LE will both have the possibility of exercising decisive influence
    over the JV. This is because both Fortum and LE have veto rights over strategic decisions of the JV whereas […] will not have any  influence
    over the commercial behaviour of the JV.

12) Therefore the Commission concludes that the JV will be jointly controlled by Fortum and LE.

Full-functionality

13) The JV qualifies as a full function joint venture within the meaning of Article 3(4) of the Merger Regulation,  as  it  will  perform  on  a
    lasting basis all the functions of an autonomous economic entity.

14) The JV will be active as an independent operator on the relevant markets of electricity generation and district heat supply, with access  to
    sufficient resources, including financing (the Notifying Parties are contributing at closing an equity contribution in cash amounting  to  €
    […] million and the JV will have access to financing from financial investors and banks as well as the EU Cohesion Fund[4]), as well  as  to
    tangible and intangible assets (a waste-to-energy CHP plant in Kaunas). The JV will also have its own CEO, managers and employees  dedicated
    to its activities, which are not limited in time.

       EU DIMENSION

15) The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 000 million[5] (Fortum EUR 4 376 million, LE EUR
    973 million). Each of them has an EU-wide turnover in excess of EUR 250 million (Fortum EUR […] million, LE EUR […] million),  but  they  do
    not achieve more than two-thirds of their aggregate EU-wide turnover within one and the same Member State. The notified operation  therefore
    has an EU dimension within the meaning of Article 2(1) of the Merger Regulation.

       MARKET DEFINITION

16) The Notifying Parties' activities overlap horizontally on the plausible market for the generation and wholesale  supply  of  electricity  in
    Lithuania. Also the JV – once fully operational – will be active on this market as well.

17) The Transaction will also give rise to two vertical relations as LE is active  on  the  markets  for  the  retail  sale  of  electricity  in
    Lithuania, which is downstream to the plausible market for the generation and wholesale of electricity as well on the market for the  retail
    sale of gas in Lithuania, which is upstream to the plausible market for the generation and supply of heat through district  heating  network
    in Kaunas on which the JV will be active.

1 Product and geographic market definition

1 Generation and supply of heat through district heating network

18) In previous decisions the Commission regarded the provision of district heating (i.e., the distribution of steam and/or  hot  water  from  a
    heat production plant to buildings) as a separate relevant product market. The geographic scope of the market was regarded as being  limited
    to the specific district heating network to which the plant is linked. However, the final product and  geographic  market  definitions  were
    left open.[6]

19) The Notifying Parties agree with the above market definition.

20) As the Transaction does not raise serious doubts as to its compatibility with the internal market under any plausible market definition, the
    exact scope of the product and geographic market can be left open.

2 Generation and wholesale supply of electricity

21) In previous decisions, the Commission has defined a separate market for the generation and upstream wholesale supply of  electricity,  which
    encompasses electricity generated in power stations, traded on the wholesale market (through bilateral agreements, power exchanges and other
    regulated market places) as well as electricity physically imported via interconnectors. However, the final product  market  definition  was
    left open.[7]

22) As to the geographic scope of this market, the Commission has considered the market for the generation  and  upstream  wholesale  supply  of
    electricity as national in scope.[8] Given the existence of fully liberalised markets and common  prices  throughout  the  different  Nordic
    price areas during the largest part of the year, the market was considered wider than national but in the end the  exact  geographic  market
    definition was left open.[9]

23) The Notifying Parties agree with the above product market definition, however submit that it is not appropriate to consider  the  geographic
    scope of the market to be as national, covering only Lithuania. According to the Notifying Parties, the  geographic  scope  of  this  market
    should be wider encompassing the area covered by the Nord Pool  Spot  power  exchange  (i.e.  Finland,  Norway,  Sweden,  Denmark,  Estonia,
    Lithuania and Latvia). In the Notifying Parties' view this is because the electricity market covered by the  Nord  Pool  power  exchange  is
    fully interconnected and therefore it would be artificial to limit its geographic scope to a single country.

24) In any event, the Notifying Parties submit that even if the geographic scope of the market was to be regarded as national,  the  Transaction
    would not raise serious doubts as to its compatibility with the internal market.

25) As the Transaction does not raise serious doubts as to its compatibility with the internal market under any plausible market definition, the
    exact scope of the product and geographic market can be left open.

3 Retail sales of electricity

26) The Commission has in past cases distinguished a separate market for the retail supply of electricity and, more  particularly,  has  defined
    separate markets for the retail supply of electricity to (i) large industrial and commercial customers[10] and (ii)  household  and  smaller
    industrial and commercial customers.[11] The Commission has defined these retail markets to be national in scope. However, the final product
    and geographic market definitions were left open.[12]

27) The Notifying Parties do not contest the above market definition.

28) As the Transaction does not raise serious doubts as to its compatibility with the internal market under any plausible market definition, the
    exact scope of the product and geographic market can be left open.

4 Retail sales of gas

29) In past cases, the Commission has distinguished the overall market for the retail sales of gas according to  the  different  groups  of  end
    users. Particularly, in past decisions the Commission has identified the following product  markets:  (i)  gas-powered  electricity  plants,
    (iii) large industrial customers, (iv) small industrial customers, (v) household customers. However, the final product market definition was
    left open.[13]

30) As to the geographic market definition, the Commission held the view of considering retail gas supply as  national  in  scope,  whilst  also
    considering a subnational regional delineation, depending on the specific Member State. However, the final geographic market definition  was
    left open.[14]

31) The Notifying Parties do not contest the above market definition.

32) As the Transaction does not raise serious doubts as to its compatibility with the internal market under any plausible market definition, the
    exact scope of the product and geographic market can be left open.

2 Competitive assessment

Horizontal overlap – generation and wholesale of electricity

33) The Notifying Parties are currently active on the plausible market for the generation and wholesale supply of electricity in Lithuania  (and
    on the Nord Pool Spot power exchange). The JV once operational in 2019 will also be active on this market.

34) If the geographic scope of the market were to be considered as encompassing the area covered by the Nord Pool power exchange,  the  combined
    market share of the Notifying Parties would be [10-20] % with an increment by LE of less than [0-5] %. Once the JV will become  operational,
    it is expected to have a minimal share equal to [0-5]% on this market.

35) If the geographic scope of the market were to be considered as encompassing the Lithuanian territory only, the market share of LE  would  be
    [40-50] % both by value and by volume and the market share of Fortum would be [0-5] % both by value and by volume. Once  in  operation,  the
    expected market share of the JV would be [0-5] % both by value and by volume.

36) Notwithstanding the large combined market share of the Parties, the Commission takes the view that Transaction will  not  raise  competition
    concerns for the following reasons.

37) First, the Transaction will not generate a significant change in the structure of the Lithuanian market. In fact, the addition in  terms  of
    market shares brought about by Fortum is limited to [0-5]% and the JV, in 2019, will bring about a further small increment of [0-5]%.

38) Second, the Parties will continue to face strong competition from a number of players. Particularly, the Parties will face competition  from
    AB INTER RAO Lietuva, currently holding an estimated market share of [50-60]%, which is  larger  than  the  combined  market  share  of  the
    Parties, as well as of other smaller players such as UAB Elektrum Lietuva with a share of [0-5]%, which is larger than Fortum's share.

39) Finally, all the volumes of electricity generated by Fortum in Lithuania are sold by Fortum to […] on to Nord Pool Spot.

40) Based on the above and all available evidence, the Commission concludes that the Transaction  will  not  raise  serious  doubts  as  to  its
    compatibility with the internal market as regards the market for the generation and wholesale of electricity.

    Vertical overlap

    Generation and wholesale of electricity and retail sale of electricity

41) The Transaction gives rise to a vertical relation between the upstream market for the generation and  wholesale  supply  of  electricity  in
    Lithuania, where the Parties are active, and the downstream market for the retail sale of electricity in Lithuania,  where  LE  will  remain
    active.

42) The Commission takes the view that the Transaction will not raise competition concerns as it will not affect the ability of LE to engage  in
    a foreclosure behaviour.

43) First, the Transaction does not have a significant impact on the upstream market where LE already has a  market  share  of  [40-50]  %.  The
    increment brought about by the JV and Fortum will be limited to an aggregated share of [0-5]% and will not significantly affect  the  market
    structure.

44) Second, on the upstream market the Notifying Parties will face competition from a stronger competitor - AB INTER RAO Lietuva.

45) Third, the market position of LE on the downstream market for retail supply of electricity in Lithuania remains unchanged with market shares
    of [40-50]%[15] on the market for the retail sale of electricity to large industrial and commercial customers and  of  [40-50]%[16]  on  the
    market for the retail sale of electricity to households and small industrial and  commercial  customers.  On  these  markets  LE  will  face
    competition from a significant number of players, such as UAB Elektrum Lietuva ([10-20]% and [10-20]% respectively), UAB INTER  RAO  Lietuva
    ([10-20]% on both markets), UAB Entry ([5-10]% on both markets) and UAB Enfit ([5-10]% on both markets).

46) In light of the above, the Commission considers that the Parties will not have the ability to engage in input  foreclosure  behaviour  as  a
    result of the Transaction.

47) Based on the above, the Commission concludes that the Transaction does not raise serious doubts as to its compatibility  with  the  internal
    market with regard to the vertical relationship between the upstream market for generation and  wholesale  supply  of  electricity  and  the
    downstream market for retail sale of electricity in Lithuania.

    Retail supply of gas and provision of heat through district heating network

48) LE is active on the market for retail gas supply to heating generators and other  gas  fired  electricity  plants  in  Lithuania,  which  is
    upstream to the market for the provision of heat through a district heating network in Kaunas. The JV will  be  active  in  the  market  for
    district heat supply and will require gas to start-up the CHP plant.

49) There are several players active on the Kaunas district heating network: Kauno Termofikacijos elektrine (KTE), UAB Geco Kaunas, UAB Pramones
    Energija, UAB Aldec General, UAB Oneks Invest, UAB Lorizon Energy.

50) There is, however, only one heat supplier that currently uses gas for heat generation in Kaunas. Other competitors operating on the district
    heating market confirmed during the market investigation that they do not need gas for their operation.

51) LE has a [90-100] % share on the markets for retail sale of gas to heating generators and other gas fired electricity plants  in  Lithuania.
    Other competitors on this market are UAB "Dujotekana", UAB "Grata Group", UAB "Haupas", AB agrofirma "Josvainiai".

52) The Notifying Parties submit that the Parties have no ability to engage in  input  foreclosure  behaviour  with  regard  to  gas  supply  to
    competitors on the district heating market in Kaunas. According to the Notifying Parties the JV's competitors could start  buying  gas  from
    LE's competitors as well as from the natural gas Exchange Get Baltic. The market investigation  confirmed  that  the  competitors  have  the
    ability to procure gas from other suppliers than LE. The Commission therefore, considers that the Notifying Parties have likely  no  ability
    to engage in foreclosure vis-à-vis their competitors on the district heating market.

53) Furthermore, the Commission considers that a potential foreclosure strategy would likely not have any impact on competition on the  district
    heating market in Kaunas. First, there are still five suppliers that operate their district heat plants without any gas and  will  therefore
    be able to supply heat to the district heat customers in Kaunas. Second, the competitor on the district heating market producing  heat  from
    gas has started preparation works for reconstruction of its gas powered plant into a biofuels plant which would meant that gas  will  likely
    be replaced by biofuels.[17]

54) Based on the above, the Transaction does not raise serious doubts as to its compatibility with  the  internal  market  with  regard  to  the
    vertical relationship between the market for retail supply of gas to heating generators and other gas fired power plants  in  Lithuania  and
    the market for district heating in Kaunas.

       CONCLUSION

55) For the above reasons, the European Commission has decided not to oppose the notified operation  and  to  declare  it  compatible  with  the
    internal market and with the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of the Merger Regulation and  Article
    57 of the EEA Agreement.

For the Commission
(Signed)
Margrethe VESTAGER
Member of the Commission

-----------------------
[1]   OJ L 24, 29.1.2004, p. 1 ('the Merger Regulation'). With effect from 1 December 2009, the Treaty on the Functioning of the  European  Union
('TFEU') has introduced certain changes, such as the replacement of 'Community'  by  'Union'  and  'common  market'  by  'internal  market'.  The
terminology of the TFEU will be used throughout this decision.
[2]   OJ L 1, 3.1.1994, p.3 ("the EEA Agreement").
[3]   Publication in the Official Journal of the European Union No C 351, 23.10.2015, p. 23.

[4]   The JV will have access to financing possibly via the EU Cohesion fund. The Notifying Parties informed the Commission that an amount of  up
to ¬  69 million from the EU Cohesion Fund is allocated for the Kaunas CHP project in the Operational Programme of the EU Cohesion Fund for 2014-
2020 for Liththe EU Cohesion fund. The Notifying Parties informed the Commission that an amount of up to € 69 million from the EU  Cohesion  Fund
is allocated for the Kaunas CHP project in the Operational Programme of the EU Cohesion Fund for 2014-2020 for Lithuania, but still needs  to  be
formally approved by the Commission through a State Aid Notification.
[5]   Turnover calculated in accordance with Article 5 of the Merger Regulation.
[6]   Case COMP/M.5793 – Dalkia CZ/ NWR Energy.
[7]   Case COMP/M.6984 - EPH/ Stredoslovenska Energetika.
[8]   Case COMP/M.6984 - EPH/ Stredoslovenska Energetika.
[9]   Case COMP M.3268, Sydkraft/Graninge and Case COMP M.3867, Vattenfall/elsam and E2 Assets.
[10]  Case COMP/M.5512 Electrabel / E.on, of 16 October 2009; case COMP/M.5496 Vattenfall / Nuon  Energy,  of  22  June  2009;  case  COMP/M.6225
Molaris / Commerz Real / RWE / Amprion, of 23 August 2011.
[11]  Case COMP/M.6225 Molaris / Commerz Real / RWE / Amprion, of 23 August 2011; case COMP/M.5467 RWE / Essent, of 23 June 2009.
[12]  Case COMP/M.5512 Electrabel / E.on, of 16 October 2009; case COMP/M.5224 EDF / British Energy, of 22 December 2008;  case  COMP/M.4180  Gaz
de France / Suez, of 14 November 2006; case COMP/M.3696 E.ON / MOL, of 12 December 2005.
[13]  COMP/M.6910 Gazprom/Wintershall/Target Companies, COMP/M.4180 Gaz de France/Suez, COMP/M.3440 EDP/ENI/GDP and  COMP/M.5740  Gazprom/A2A/JV.

[14]  COMP/M.6910 Gazprom/Wintershall/Target Companies.
[15]        2014 share, both by volume and by value.
[16]  2014 share, both by volume and by value.
[17]  KTE website, http://www.kte.lt/lt/projektai/projektas-1.html.