Customer Choice in Europe?

On July 1st, 2007, all member states in the European Union were supposed to have enacted certain European Union directives opening their energy markets to full retail competition. While some European countries, such as the UK, have had very active retail markets for some time, many others – most particularly those in Central and Eastern Europe have not. As of August 1st and, after a review of most European Union retail energy markets, I believe I can say that not much has really happened in terms of customer choice though, on paper, it should have. Meanwhile, the on-going deregulation, privatization and liberalization in European energy markets has had a significant impact in the merger & acquisition arena as energy companies and utilities jockey for (a dominant) position.

Customer Choice and Dominant Suppliers
Research into the current state of retail customer choice in Europe is fascinating. In most European countries, opening up of markets is hindered by the existence of incumbent energy companies who like to see competition – just not in their market! In fact, the February report written by UtiliPoint and SunGard Energy Systems based on a survey of FLAME delegates , “the dominant view among those respondents who believed that European energy companies are not committed to achieving long-term competition, is that large national incumbents have more to lose than to gain through increased competition. Many believe that national governments are more supportive of their national ‘champion’ than the consumer and that the incumbents can make more profit by protecting their monopolies – a belief supported by the recent failure (in February of this year) by the national energy ministers to reach accord in support of the European Commission’s demands for ownership unbundling. There is a real sense of a two-sided picture whereby smaller and medium-sized energy companies are keen to access competitive markets and see greater competition whereas national monopolies or incumbents have too many vested interests. The real cynics among the respondents go farther suggesting that national incumbents are keen to see increased competition in foreign territories but not in home markets!”

In many other European countries, flawed regulatory and liberalization processes have resulted in a situation where, in theory, markets are open but in practice, nothing much has changed. A call to E.ON, my electricity provider here in the Czech Republic, with a request to switch to another provider was met by a very confused customer service rep. who plainly did not know that I had that legal right. In the Iberian peninsular, ostensibly retail competition exists and there are many new entrants to the markets there. But, in practice, the regulators have set up side-by-side regulated and non-regulated markets and subsidize the incumbents to offer a regulated rate to customers that is below the competitive rate. Customer switching has occurred but, not surprisingly at very low rates. New entrants have complained about the situation and Spain is the subject of an unprecedented number of European Union investigations. In countries like Poland, the government first engaged in restructuring and privatization of the energy industry (as yet incomplete). While providing investors with opportunities to invest in Polish energy incumbents and attracting western European utilities and energy companies such as E.ON, RWE, EDF and others to take major ownership positions in Polish energy companies, it has done little to actually open the market to competition. In essence, the old regional distributors might have new names and owners, they may have been consolidated, but there are few real new entrants.

Lack of Consumer Education
In fact, there has been little publicity or consumer education efforts regarding their ability to switch supplier in most parts of Europe and many citizens do not know that, on paper at least, they can do this. A visit to most national energy regulator’s websites, where a consumer ought to be able to find information regarding their ability to switch, leaves one confused and befuddled. Yes, they all say that customer’s now have choice of supplier but not many offer instructions on how to do this. Even if the consumer could work it out for themselves, I believe the process to switch would be in fact very tiresome and confusing. Even after hours of research, I could not find any list of retail energy companies I could switch to in Poland or the Slovak Republic and I am a somewhat practiced hand at energy industry research. How Mr. Average Consumer is expected to do it is beyond me.

Here in the Czech Republic, a call to the regulator got me directed to a ‘list’ of licensed traders but that list was last updated in 2005 and a quick search on several of the companies it listed demonstrated that either they either no longer exist or they are simply large commercial and industrial users procuring their own energy. The Czech regulator site is interesting. In the EU report last year on de-regulation across Europe, the Czech Republic regulator’s website is extolled as providing a list of retailers and even a price calculator. In fact, as stated above, the list is woefully out of date, does not include contact details for more than 60% of the listed entities and as for the calculator….its virtually unusable.

In the year I have been living in the Czech Republic, I have yet to see any kind of commercial, advertisement or anything else that alerts the consumer to their ability to switch. You would have to literally call the regulator to find out anything about it and it seems that the Czech Republic is not unusual in that regard. In most countries in Europe, the right to switch supplier in the commercial and industrial arena has been in existence for sometime but again, switching rates are very low in most countries.

Bad Timing?
So is retail deregulation and competition in Europe a myth in the minds of European beaurocrats? At the moment, except for a few countries, it really does seem that way. But, the EU is dedicated to making it happen and while it may take some time, it will eventually become a reality. One of the other political issues, of course, is that competitive energy markets were sold here based on the idea that it would result in lower prices for consumers. Against a backdrop of rapidly rising energy commodity prices these last several years, this vision has obviously not occurred. It’s not the fault of competitive markets that prices went up but it looks that way to uneducated consumers.

The Dominant Dominate More
So who has gained from this so far? Well, mergers & acquisitions are running full steam ahead in the European utility space as cash rich energy companies seek to expand their operations across Europe. Take for example facts from a recent UtiliPont IssueAlert about Gazprom. Over the past few years, Gazprom has obtained approximately 10 percent of the UK's retail market and rumors persist that it would like to purchase one of the UK's big suppliers. The group also has a 10 percent share of an interconnector pipeline between Belgium and the UK and is believed to want a similar share of a UK-Dutch link. In Germany, it holds a 35 percent stake in WINGAS, which owns around 2,000km of pipelines in Germany, as well as Europe's largest underground gas depot at Reden. Russia and Germany have also teamed up to build a gas pipeline under the Baltic Sea, bypassing Ukraine and Poland. The company is also active in distribution markets in Austria, Belgium, the Netherlands and throughout Eastern Europe, and last year it signed contracts with several big European energy companies, including Gaz de France (GDF) and Eni of Italy. In return for allowing Gazprom access to distribution pipelines to transport and sell its natural gas directly to new customers, Gazprom signed long- term supply contracts with both GDF and Eni. In recent weeks, its footprint has expanded further. Its subsidiary, Gazprom Marketing & Trading (GM&T) began power trading in Germany in March. This is the third European country in which it trades—the UK and France are the others—and Keith Martin, GM&T's Head of Trading said: “Our vision is to be the leading global energy trader.”

In fact, Europe’s biggest energy players have done very well out of this European effort as it has afforded companies like E.ON, RWE, CEZ, EDF and others, on the one hand, opportunities to acquire interests in privatizing utilities in other European markets, while on the other, they have managed to protect their own markets often with their own government’s active support. To use the Czech Republic as an example again, the old regional utilities were consolidated and privatized by the government in the run up to liberalization and are now essentially controlled by E.ON, RWE and CEZ. How is that for consumer choice? It seems to me that the only loser so far has actually been the consumer who instead of being supplied by a nationalized company is now forced to obtain their energy from a dominant commercial enterprise whose basic philosophy is to make profit for shareholders as opposed to serve the needs of a community with energy.

Next Steps
For retail de-regulation to become a reality in practice I believe a number of things have to happen. The first of these is that consumers need to be educated that they have a choice and they require easily obtained information regarding how to switch and who they can switch to. Today’s efforts are by and large top down being driven by Politicians and beaurocrats in Brussels – that work continues and needs to be doubled in intensity but, if customer’s were calling the regulators, consumer groups and their local (dominant) utility looking to switch – then something might change. Secondarily, I believe that many of these markets are currently unattractive to new entrants due to regulatory and operational issues and these need to be addressed to truly open markets to new players.
Finally, a serious review needs to be taken into the domination of European energy markets by a smaller (and smaller) group of larger (and larger) players. There have been rumblings already about forcing the breakup of these companies here recently. Further, the position of dominant energy companies that are partly government-owned and hence fly a national flag needs also to be reviewed. There can be no competitive energy markets until all companies are operating on a fairly level playing field and right now that isn’t the case.

This article also appeared as UtiliPoint Issuealert newsletter - available for free at www.utilipoint.com