Bundeskartellamt issues warning to electricity provider on account of excessive electricity prices within the context of CO2 emission allowance trading

The Bundeskartellamt has informed RWE AG, Essen, of its preliminary evaluation that the industrial electricity prices charged by RWE in 2005 were abusive as the company had passed on more than 25 per cent of the value of its CO2 emission allowances within its electricity prices.

The Bundeskartellamt based its evaluation on the economic insight that opportunity costs are in principle taken into account in a business calculation. However, this requires that the emission permits or CO2 allowances allocated free of charge are actually available for sale.

In 2005, numerous companies from the electricity intensive sector had complained to the Bundeskartellamt, some of them via the German association of industrial energy and power management (VIK) and the Association of the German non-ferrous metals industry (WVM), about the practices adopted by the electricity companies in CO2 emissions trading. Since 1 January 2005 power plants and companies active in other CO2 emitting industries are obliged to use emission allowances for their production. By trading such allowances the emission of greenhouse gases is to be reduced in a cost efficient way.

In response to these complaints the Bundeskartellamt initiated proceedings against RWE and E.ON Energie AG at the end of 2005. The warning letter issued to RWE concerns exclusively the setting of electricity prices payable by RWE’s industrial customers in 2005. Proceedings against E.ON will be continued immediately upon conclusion of the RWE proceedings in consideration of the findings resulting from these.

RWE and E.ON together hold a dominant position on the national electricity markets. This dominance results from the fact that there is no substantial competition between the two companies and that they have a paramount market position in relation to their competitors. Both companies together produce a good 60 % of the net amount of electricity generated, operate power plants for base, medium and peak load supplies, together hold more than 200 minority stakes in municipal utilities and regional suppliers and control more than 50-70% of the German electricity networks.

The Bundeskartellamt examined whether the prices set by RWE differed from those that would have to be expected under effective competition, which would prove an abuse of dominance. Consequently, the subject of the investigation was that part of the price which represents the passed on opportunity costs resulting from emissions trading.

A comparative survey of other sectors participating in the European emissions trading scheme has shown that competitive conditions in other markets do not allow for the passing on of the costs of emission allowances that have been allocated free of charge. This applies not only to sectors where companies compete worldwide with other companies that do not participate in the emissions trading scheme, but also to sectors such as the petroleum, cement, lime or sugar sector where German companies compete with other national or European companies that also participate in the emissions trading scheme.

Irrespective of the comparative survey of other sectors, the authority’s investigation also proved that for electricity supply reasons and according to emission law only a small number of the emission allowances allocated to the power plant operators could actually be put to other use. Only with regard to these allowances would a monetary advantage have been lost had the value of the allowances not been included in the price calculation.

For this reason, in its provisional decision the Bundeskartellamt does not object to up to 25% of the allowance value being passed on within the electricity price. This figure was established by taking into account a conversion factor for all types of fuel and a “relevance surcharge”.
The passing on of any amount exceeding this figure would constitute an abuse of market dominance.

RWE and the other parties to the proceedings have until 22 February 2007 to comment on the warning.