140 Chaptei This was reinforced when the chairman of Ruhrgas was asked by the I .1 German government to renegotiate the terms of the Yamburg contract.3'1 However, in October of 1990, Wintershall - which had been Ml complaining about its relatively small 15% stake in VNG - announcol | coup: a cooperation agreement with Gazprom at the heart of which was n joint venture company to market Russian gas in the eastern part of Germany.35 (Gazprom apparently first proposed a similar arrangement In Ruhrgas and was rebuffed.) This allowed Wintershall to bring theno transmission aspirations to fruition by building the Stegal pipeline carrying Russian gas from St Katharinen on the German/Czech border, IQ join the Midal line south of Kassel (Map 5.1).36 There ensued a large and well-publicized price dispute between VNG and WIEH (but in reality between Ruhrgas and Wintershall) which centred on charges for traini fees and provision of related services.37 These events need to be placed in the context of the debate over the introduction of competition and foreign investment into the industries of the former GDR, and German industrial politics.38 However, in the context of this study they mark the beginning of gas-to-gas competition in a uniii no supply competition ... the lack of competition has negative effects on tin national economy as a whole - the extraordinarily high level of energy price* 1 in Germany is a burden for industry and its international competitiveness. In their defence, the energy companies often argue that they might not bo able to guarantee security of supply if more competition were introduced. Bui this argument is not very convincing. The system of energy supply in Germany was created at a time when security of supply might have been a real problem ... today, electricity and gas networks cover virtually the whole country and sufficient production facilities are in place. With the achievemeni of this objective, the question is now whether the regional monopoly model put in place in order to create and develop the system is still appropriate.42 Since 1991 landmark legal cases began to test the parameters of existing German competition law with respect to the gas and electricity industries. The Ruhrgas-Thyssengas demarcation agreement43 As just noted, demarcation agreements were due to expire in 1995 and the first of these agreements was between Ruhrgas and Thyssengas. An attempt by these two 42 Dieter Wolf, 'Competition, Liberalization and Privatization - a German Perspective', a paper to the Royal Institute of International Affairs Conference, Emerging Policies for European Energy, December 1994. 43 Cameron, op. cit., Vol. 1, pp. 59-60. I .in, mat institutional developments 145 limipnnies to renew their agreement at the end of 1994 was blocked by the h '< > The agreement allowed the two companies to supply customers in fin 11 other's areas, thereby excluding other suppliers; prevented Thyssengas fi«tin supplying in any other company's supply area, thereby further pi meeting Ruhrgas' interests in those areas; and allowed the two lompanies to deliver gas jointly to four local utilities.44 The Federal Cartel Office had declared this agreement (and by implica- ......all other demarcation agreements) incompatible with Article 85(1) of the liU Treaty. The basis for that judgment was that because Thyssengas imports more than half its gas from the Netherlands, and Ruhrgas purchases part of its gas from other member states, the demarcation agreement can be considered to 'limit trade between member states and impede . ninpetition within the boundaries of the common market'. In contrast to i lerman competition law, EU law does not provide for exemptions from I lie ban on cartels for demarcation and concession contracts in the energy lector. The parties (Ruhrgas and Thyssengas) appealed to the Berlin Court H Appeals which referred the matter to the European Court for a decision lis to whether the FCO is competent to apply Article 85 to the German gas mid electricity industry. A ruling has yet to be made, but the case looks likely to be overtaken by the passage of the new German energy law. The Selfkant case The small municipality of Selfkant, located within the demarcation area of Thyssengas, had been attempting to expand its gas distribution system. In 1993 Gasunie (the Dutch merchant transmission company) and Thyssengas (an important customer of Gasunie) refused to ill low Selfkant to purchase gas from Mega (a Dutch gas supplier and affiliate of Gasunie). After taking its case to the Commission, Selfkant eventually obtained offers of supply both from the Dutch exporter and from the authorized Thyssengas subsidiary (Aachen Westgas).45 Third party access: the Weissenborn case The major German gas companies - led by Ruhrgas - always maintained that access was not only 14 'Ruling soon on German demarcation case', Gas Matters, October 1996, pp. 7-9. ',s Cameron, op. cit., Vol. 1, p. 61. Chapt 146 undesirable, but also contrary to constitutional protection of prop rights. There had also been a serious legal debate as to whetliei would be contrary to German competition law. Although the I Restrictions against Competition states that the denial of transput i.iimn rights constitutes a prima facie abuse of a dominant position, this prim had never been tested because of the demarcation agreements between I lift transmission companies. It was not foreseen that Wintershall would sun m\ in entering the gas market by forming a joint venture with Rusmh'i Gazprom, which would both build pipelines and market gas in Gemimiy As a new entrant, Wingas was not party to any agreements and there I mi not required to respect the demarcation areas. In 1992 a paper manufacturer (Weissenborn), supplied by Erdjill Sudsachsen, which in turn purchased gas from VNG, signed a conliuul with WIEH at a lower price. The latter then requested VNG to transpoi I III gas to Weissenbom's premises. (As mentioned, VNG's ownership 1« dominated by Ruhrgas 35% and BEB 10%, but Wintershall also ownil 15% share and Gazprom 5%.) When VNG refused, on the grounds tlmi access would not have been necessary if VNG had bought the gas lioiii WIEH and resold it to Weissenborn, the case was referred to the FCO. The FCO supported the case for TPA, ruling that it was 'not incom patible with Germany competition law'. VNG immediately appealed In the regional court in Berlin which overturned the FCO. Undeterred, tint FCO appealed this judgment to the Federal Bundesgerichthof (higher administrative) Court which ruled, against the findings of the Fedei.il Cartel Office, that, in this particular case, VNG did not have to carry gu| for WIEH to the paper company in Lower Saxony. This ruling was madi on the basis that VNG had made an offer to the customer which mate In i WIEH's offer. Therefore, since the offers were similar, the Court saw no basis for allowing WIEH to use VNG's pipeline network.46 Thus the ruling neither established a precedent, nor conclusively settled the debate between: )nal institutional developments 147 46 Ibid., pp. 60-61; 'German Cartel Office: If at first you don't succeed...' March 1995, pp. 4-6. Gas Matte I In- FCO which believed that the ruling established the compatibility of I PA with German competition law on the basis that: TPA should be negotiated (not enforced); TPA does not constitute a hindrance to the pipeline owner's basic i (institutional right of freedom of economic activity; the obligation to permit TPA, in order to create competition, does nol constitute an unreasonable promotion of competition to the pipeline owner's disadvantage; VNG which believed that: gas supply companies are not in principle obliged to grant TPA; refusal to permit TPA can be contested only if it constitutes abuse of n dominant position. 'I lie legal problem for those seeking access was that the Court did not give Mily indication, as to the circumstances in which it would be prepared to Hi mil access. The practical problem was that since the case demonstrated 'I'M access can be legally defeated if an existing supplier is prepared to mulch the offer made by a new supplier, others were dissuaded from linking further attempts. If consumers believe that they can force their i ui rent supplier to reduce prices by threatening to take gas from an iillernative supplier using TPA (even if they have no real intention of doing no) this could have a significant impact on the future behaviour of both lonsumers and suppliers. However, the impact may be limited if the case Inis to be litigated before the existing supplier can be coerced into offering tetter terms. It is significant that, following this case, Wintershall agreed a ilemarcation agreement with VNG in eastern Germany which seemed to imply a recognition that competition by means of access through pipelines would not be possible. ('ompetition developments in transmission and marketing Aside from these major cases, the perception of impending institutional and icgulatory change has focused the minds of all market players. According lo the CEO of the production and transmission company BEB: 148 Chapl, Niiiional institutional developments 149 Clearly, with the changes in the German legal framework, and in particulai iln proposed ending of the system of demarcations, the market will become mOJI fluid. We are looking outside our traditional areas in Germany, and of cum | we are looking beyond the borders of Germany. However, BEB has clear views on the limits of competition, even williou demarcation areas: In the future there may be a re-allocation of supply areas between Ruhi).i and BEB ... But for us, there is a basic principle of competition here: we H not sell the same gas twice. We do not sell to Ruhrgas and then try to sell ii in Ruhrgas' customers.47 It is also clear that in some instances there has been no need for legal or regulatory intervention in order to guarantee access to pipelines. In 19%, BEB sold some spot gas to the Polish Oil and Gas Company (PGNiG) anil requested transportation through VNG's system. VNG initially refused on the basis that it should be allowed to perform the merchant function of buying from BEB and selling to PGNiG. However, it eventually agreed lo transport the gas. The CEO of BEB drew the conclusion that: In long term relationships you have these occasional disputes, but there wan no real problem between us and VNG. They are a first class company and wo have a general understanding with them that we will cooperate in a number ol areas.48 However, in resolving this transportation problem, it was undoubtedly helpful that BEB owns 15% of VNG and is also a shareholder in Ruhrgan which owns another 25% of the company. It also provided a stark contrast to an episode nearly 10 years earlier in which Ruhrgas refused to transport 47 The statement that 'we do not sell the same gas twice' is a direct quote from the judge'* reasoning in the Weissenbom case. Apart from the issue of a matching offer, Wintershall'n request for access was refused because the judge found that Wintershall and VNG had bought gas from the same source (Gazprom) and that Wintershall would sell to both VN( | and a VNG customer. The judge (somewhat confusingly) construed this potential situation as 'selling the same gas twice'. 'BEB prepares for change', European Gas Markets. 24 April 1997, pp. 6-7. 48 Ibid. Norwegian gas to Austria as part of the Troll contracts. After protracted negotiations, Ruhrgas purchased the gas and 'resold' it to Statoil on the (In man/Austrian border.49 Another notable example is the experience of Bayerngas, the regional Itavarian transmission company. Following the loss of its largest single Industrial customer (the chemical company Wacker-Chemie) to Wingas in I')%, the company's Chief Executive noted the impact on the company: We lost it for a variety of reasons, including the price. But for us the most important thing was that Wacker was a wake-up call; it really did make the whole company sit up and take notice.50 It may therefore not have been a coincidence that Bayerngas then signed a 11 ml tact with Wingas in 1997 which will allow for the purchase of up to h% of its supplies, despite the fact that Ruhrgas, hitherto the company's »ole supplier, was in the process of significantly raising its shareholding in llayerngas. Other regional transmission companies, which had been exclusively supplied by Ruhrgas, have also begun to include Wingas in ilnir portfolios, in particular Westfälische Ferngas and VEW, two of (in many's largest regional suppliers.51 These developments could probably have only taken place with the agreement of Ruhrgas, thereby icleasing the regional companies from their exclusive purchase obligation. IIic purchases from Wingas do not involve displacing Ruhrgas sales, lather they allow that incremental purchases of gas - up to a certain percentage of total requirements - can be made by the regional companies mid municipalities. One way in which the German regulatory authorities are attempting to break down the barriers of the concession agreements is to use their approval of shareholding exchanges as a bargaining counter. The purchase of 50% of transmission company Thyssengas' shares by the electricity company RWE was conditional upon the transmission company removing ''' 'Ruhrgas holds out against transporter status', World Gas Report, 19 June 1987, p. 1. 'Exciting times for Germany's Bayerngas', Financial Times International Gas Report, 21 March 1997, pp. 6-8; 'Bayerngas revamp finalised', ibid., 27 June 1997, p. 14. 'Wingas makes inroads on rival Ruhrgas', ibid., 16 May 1997, p. 3. 'VEW, Westfaelische I'erngas create new German gas major', European Gas Markets, 10 April 1997, p. 4. 150 Chapter exclusivity clauses from its contracts.52 The RWE investment in Thyssen gas is again part of a trend of German electricity companies becomin involved in the gas industry, both within Germany and elsewhere in Europe Vertical integration by means of purchasing equity in other eneri companies, particularly between those companies involved in demarcatioi and concession agreements, is another area where competition authoritu have begun to impose limits. In 1997 the FCO blocked a merger between Westfälische Ferngas and VEW Energie, which would have created Ilm third largest transportation company after Ruhrgas and Wingas, on the grounds that it would have given the resulting company an excessively dominant position in North Rhine-Westphalia. Interestingly the parties did not appeal the decision following the Bundesgerichtshof Court's rejection of two attempted electricity investments by RWE and PreussenElektrn The Court made clear that acquisitions of this kind will in future be based on three criteria: (1) dominant energy companies will need to keep their equity shares in distribution companies below 20%; (2) this equity participation must be limited in time; (3) the equity agreement must not include a clause which would allow the new shareholder to veto the distribution company's choice of suppliers; choice of generation decision; decision to extend ils distribution activities into neighbouring regions.53 Mindful of the increasing competition and impending legal/regulatoi changes within Germany, German companies have begun to extend thei activities elsewhere in Europe. This applies not simply to the purchase o] equity in other European gas companies - for example the Ruhrgas' and Bayernwerk's purchase of equity in Hungarian gas distribution companies and RWE taking a share in the Prague gas works, and Bayernwerk. European Gas Markets, 52 'RWE, Thyssengas agree to surrender exclusivity clauses' 23 May 1997, p. 4. 53 'German cartel office bans merger of WFG and VEW, and 'Berlin court ruling upsets energy majors' strategy', Gas Matters, September 1997, pp. iii-iv and August 1997, National institutional developments 151 Herman gas companies are beginning to supply gas to other countries: Huhrgas to MOL (Hungary) and BEB to Distrigaz (Belgium), Dangas 11 tenmark) and in negotiation with both Transgas (in the Czech Republic) mid PGNiG.54 An example of a more aggressive foreign approach by German iniiipanies is the Ruhrgas contract (starting in 1999) to supply Austrian || itibution companies at Linz and Salzburg, breaking the monopoly of (he Austrian transmission company OMV.55 This does not involve issues of Access since Ruhrgas will build a new pipeline to deliver the gas. It is Uncertain whether Ruhrgas took this action as a result of the Wingas/OMV pipeline supplying the Wacker-Chemie plant which had been taken from Kuhrgas' customer Bayerngas. However, as a further retaliation, it has been suggested that the OMVAVingas pipeline may be expanded within llavaria to try and expand market share, almost certainly at the expense of Kuhrgas.56 This kind of overt competition between two major European transmission companies, Ruhrgas and OMV, breaks all the established iiiles of European gas commerce and is a clear indication of the dawning of a new, more competitive era. Lessons from Germany I-vents in the German gas market since 1991 clearly demonstrate that gas-lo-gas competition has arrived in the country, although by the rather unusual method of building parallel pipeline networks to compete for | ustomers. With ferocious resistance from established gas companies to government and regulatory attempts to introduce liberalized access to lipelines, the first development has been competition between transmission ompanies largely selling Russian gas. The emergence of Wintershall as a pp. x-xi. " HEB has already signed a contract for winter peak supplies to Czech Transgas. This may lie ihe forerunner of a more permanent contractual relationship. 'BEB, VNG and Transgas Mf.n contract for winter gas deliveries into Czech Republic', European Gas Markets, 28 November 1997, p. 4. " 'Ruhrgas price cut breaks Austrian monopoly', Gas Matters, January 1997, p. 1; 'Kuhrgas plans Austria Anschluss', ibid., February 1997, p. 4. f 'OMV to help Wintershall', International Gas Report, 18 April 1997, p. 7. 152 Chtijilci major player in German gas transportation and marketing, disturbing I long-established status quo, was due to a number of factors: • the reunification of Germany followed by the collapse of Soviet COj munism which created an entirely different German market and removed many of the ideological objections to the import of Russian gas; • the inability of BASF to obtain what it considered to be satisfactory terms for supply to its chemical plants due to the Anlegbarkeitspnn I pricing which in turn created sufficient incentive for BASF to dm such huge investments and allowed WIEHAVingas to undercut the pi i< | of the incumbent merchant companies and persuade customers m switch supplier; • the special relationship with Gazprom which, with the creation of I ho WIEH and Wingas joint ventures, brought to Wintershall's pipeline pi 11 jects the credibility which they had hitherto lacked. Norwegian produi ■ have repeatedly declined to sell gas to the Wintershall joint ventuicn, giving rise to allegations of unfair practices and a case brought uni being free to purchase their supplies - are increasingly using the threat nl competition to reduce purchase prices from their traditional supplier.58 The type of pipeline-to-pipeline competition could not have taken hold In Germany without very significant existing margins in the gas limismission sector. Had BASFAVintershall not been able to foresee their iilnlity to build the infrastructure and still sell significantly below the prices being offered by the dominant companies, they could not have iillorded to take such a major commercial step. The objection of liberal 11 onomists to the German pipeline-to-pipeline model is that, in requiring iw<> sets of pipelines to be built, it imposes significantly higher costs and lower efficiencies than competition through access. While this may be an Unassailable theoretical position, it is unlikely to be relevant to German legal and political circumstances in 1997, until the owners of pipelines i lioose, or are forced, to provide access to their systems. Pipeline-to-pipeline competition has brought lower prices to German Industrial customers, and as such it has been a welcome development for Imlh politicians and competition authorities. The resistance of the established gas transmission companies to legal and regulatory changes which would introduce liberalization has continued in parallel with the development of competition. Yet despite their resistance, it is clear that inmpanies are positioning themselves both at home and abroad for nnticipated changes. This includes attempted joint ventures and alliances Im ■ i ween gas and electricity companies in both German and foreign markets. Alongside the evolution of national legislation, the FCO has been lighting a range of competition cases, with mixed success, testing out the boundaries of German law and the applicability of European law. The rnvcrnment and regulatory institutions appear neither radical in their " The CEO of Wingas noted that the Bremen municipality achieved a significant reduction In its gas costs, just by using the threat of a Wingas purchase, which did not take place. 'Wintershall in '96 profits surge'. International Gas Report, 18 April 1997, pp. 14-15. 154 ChapW Niiiional institutional developments 155 goals, nor in any great hurry to achieve them. Their actions suggest patient strategy of incremental change in legal and regulatory framewoi using national and EU legal instruments to achieve their goals. Since 101 the government has been trying to pass new energy legislation, to sw away the monopoly elements of demarcation and concession agreement and provide some degree of access to pipelines supervised by the Fedoi Ministry of Economics.59 This legislation seems likely to be passed during 1998, but it will not include any provision for access, other than 111til provided by the EU Gas Directive. The likely adoption of negotiated access will mean that the FCO will remain in charge of gas regulation. In terms of market structure, the authorities have had some success I limiting the degree of attempted horizontal and vertical integration in (lit1 gas and electricity industries by which companies have tried to pre-empt the removal of demarcation and concession agreements. As long as the ju industry continues to move in the direction of greater competition and liberalization the competition authorities appear to be content. Thii patience seems to be a combination of Realpolitik - that this is the moil that can be achieved in the current political situation - and a belief that fuhm market developments in Germany will set the stage for the desired degn i of liberalization, making legislation and regulation much easier to enact. The most important goal of both government and regulatory authorities is achieving price reductions for an industrial sector which has for somt time been paying some of the highest gas prices in Europe. The first step towards competition - eliminating demarcation and concession agreo* ments - can go a considerable way towards achieving across-the-boanl price reductions for industry. Assuming that this can be achieved, thl German authorities may then turn their attention to questions of liberali zation with negotiated access as the first step in this process. From the point of view of competition and market structure, it is as yet uncertain whether the traditional market dominance of Ruhrgas is simply being replaced by the duopoly of Ruhrgas and Wingas, each company allied to a major producer (or set of producers): Wingas with Gazprom 59 In fact the draft energy legislation is more directly concerned with the electricity indusliy than with gas. It will transpose into German law many of the provisions of the till Electricity Directive (see Chapter 5). I'nhrgas with Statoil and other Norwegian producers. With each company ttlso becoming closely associated with certain distribution companies -tartly through equity investments by these companies - the German gas market could become divided into two increasingly vertically integrated blocs: 'forces of Ruhrgas' versus 'forces of Wingas'.60 It is likely that this I aid of vertically integrated duopoly will turn out to be too simple a strúcim al projection of what is likely to become an extremely complex market. The geographic and economic centrality and influence of Germany within Europe are such that developments in the German gas market • ninot but have a significant affect on surrounding countries, and possibly In the wider Europe. Significant development of competition in German gns markets will reduce prices to industry and could give rise to similar i innpetitive pressures in neighbouring countries. Development of liberali-Ution would not only remove powerful gas industry opponents to this kind of change within the European Union as a whole, but could transform iliein into proponents for faster change elsewhere in Europe. Spain: anti-competitive structure with rapidly emerging liberalization l he Spanish gas industry, a relatively small but rapidly growing gas market, presents an interesting contradiction in terms of competition and llhcralization in European gas markets. Gas Natural is the overwhelmingly dominant gas transmission and distribution company, selling gas to around '>(>% of the Spanish market. The company was formed in 1991 by a merger of the country's two largest distribution companies with Repsol's gns distribution business. In 1994 Gas Natural purchased 91% of the npiity of Enagas - the monopoly transmission company. The creation of < las Natural appeared to be a defensive privatization measure by political mul commercial interests, partly intent on preventing foreign incursion Into the industry, partly consolidating against EU-inspired liberalization measures. Gas Natural's major shareholders are the oil and energy group Kepsol with 45.3% and the Catalan savings bank La Caixa with 25.5%. So it came as some surprise when, following the election of a new ' Estrada et al., op. cit., p. 345.