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Energy - Opening Up Gas Distribution in Germany

Nov.27.2006

In January 2006, the German Federal Cartel Office ("FCO") released a formal prohibition decision against E.ON Ruhrgas AG, Germany’s largest gas supply company, stating that long-term gas supply contracts with its regional and local distributors violate Articles 81 and 82 of the European Treaty as well as Section 1 of the German Act Against Restraints of Competition (“ARC”). Following a landmark decision of the Higher Regional Court Düsseldorf in a preliminary ruling procedure, which confirmed the immediate effect of the FCO decision, E.ON had to adjust its contracts as of October 2006. On 27 November 2006, gas transmission companies Wingas, Gasunion and Saarferngas made binding commitments to the FCO to adapt their respective gas supply contracts accordingly. Pending acceptance the infringement proceedings initiated against these companies could be terminated according to Section 32b ACR by means of a binding commitment decision. It remains to be seen whether the remaining seven transmission companies will follow suit.

As a general rule, the FCO regards contracts as prohibitive under competition law when they cover more than 80% of the actual gas requirements and run for more than two years or cover 50% and run for more than four years. Moreover, in case of a tacit extension clause the FCO will consider the contract as concluded for an unlimited period of time. Finally, for the purpose of the competition analysis, multiple supply contracts between a gas supplier and a local or regional distributor will be regarded as one individual contract.

According to FCO president Böge, this development is a further milestone in liberalizing energy markets in Germany. If local utilities are no longer locked in to one gas supplier by long-term contracts, they can buy cheaper gas from different suppliers, which should ultimately benefit the consumer.

Although local utilities seem to be hesitant to change suppliers, due to issues like planning reliability and long established relationships (including crossover holdings), the breaking up of long-term contracts signals new opportunities for market entrants.

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