DONG/Elsam/E2 (European Commission, phase II)
Advisory Services
The Situation
On 13 September 2005, the Danish gas incumbent DONG notified the European Commission of its proposed acquisition of the two incumbent Danish electricity generators Elsam and Energi E2 ("E2"), as well as three electricity supply companies (NESA, Københavns Energi, and Frederiksberg Elnet). The proposed merger was linked to a share-asset deal whereby Vattenfall swapped its shareholdings in Elsam and in an E2-operated power plant for approximately 2,400 MW of Elsam's and E2's generation capacity.
At the end of its phase I review of DONG's proposed acquisition, the Commission opened an in-depth investigation, on 18 October 2005. Against the backdrop of the ongoing energy sector inquiry, the Commission examined potential horizontal and vertical competition concerns in relation to gas storage/flexibility markets, gas supply markets, electricity generation/wholesale (including ancillary services and financial derivatives), and electricity retail supply markets, as well as the risk of impeding the development of a liquid wholesale market for natural gas.
NERA's Role
NERA was instructed by DONG to provide economic advice and analysis throughout the merger proceedings, starting before the first contacts with the relevant competition authority.
Given the many interlinkages of the various markets within the gas and electricity sector, NERA performed a wide range of conceptual analyses and empirical tests, to investigate inter alia market definition (with particular focus on the relevant geographic market, including the impact of interconnector congestion within Nordpool), simulations of non-coordinated effects, vertical integration and input/customer foreclosure, and liquidity concerns. NERA also provided economic advice and support during DONG’s remedies discussion with the Commission.
The Result
On 14 March 2006, the European Commission cleared the proposed transaction, subject to commitments.
In relation to the affected markets in the electricity sector, the Commission in the end concluded, inter alia on the basis of a merger simulation model, that the transaction and the conditionally linked Vattenfall share-asset deal (which was approved unconditionally on 23 December 2005) would actually lead to an increase in competition. Accordingly, no remedies were required.
With regard to the gas sector, the Commission found that the transaction, as notified, would have led to a significant impediment to effective competition ("SIEC"), in particular through the strengthening of dominant positions in several markets. To address these concerns, DONG offered to unbundle one of its gas storage facilities as well as to implement six annual gas release auctions, each equivalent to approximately 10% of Danish demand in 2005.
The gas release programme, to be supervised by a monitoring trustee and the Danish Competition Authority, took the form of a novel two-stage process. At the first stage, successful bidders would obtain gas in Denmark and in return deliver corresponding gas volumes to DONG at another northern European gas trading hub (such as the NBP in the UK or the TTF in the Netherlands), with an auction-determined swap fee. The second stage would be a standard cash-settlement auction, but would only apply to any volumes that remained after the first stage.
In accepting DONG's storage divestment and the non-standard gas release programme (which in addition had lower volume and shorter duration than the programme agreed to in the E.ON/MOL case), the Commission explicitly acknowledged the full liberalisation of the regulatory framework in the Danish gas and electricity markets and the specific circumstances of the case, including the Danish gas reserves and DONG’s upstream contracts.
