PGE will not acquire Energa | In Principle

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PGE will not acquire Energa

Even though PGE argued that its acquisition of Energa would have positive effects, such as increased national energy security for Poland, the Polish competition authority found that any benefits would not outweigh the restrictions on competition that would result from a merger of the two utilities.

On 13 January 2011 the president of the Office of Competition and Consumer Protection issued her first decision of the year on a business concentration, prohibiting the proposed acquisition of Energa SA by PGE Polska Grupa Energetyczna SA. The basis for banning a concentration is a significant restriction of competition, particularly creation or strengthening of a dominant position. (An undertaking is deemed to hold a dominant position if its share of the relevant market exceeds 40%.)
The decision was issued following a three-month anti-monopoly proceeding, begun in October 2010 upon application of PGE. In the documentation filed with the competition authority, PGE argued that the concentration is an element of the internal, long-term plans of PGE and Energa as well the long-range decisions by the Polish State Treasury as the majority owner of both companies. PGE asserted that the planned concentration is necessary in order to meet the challenges presented by the growing regionalisation of energy markets, and that it would advance the government’s energy policy and enable the merged companies to obtain the financial potential they need to carry out necessary investments, creating an energy group with a strong financial position, as well as releasing unique synergies between PGE and Energa by reducing the operating costs of both companies and the unit costs of investment outlays.
During the proceeding, the office conducted a review of the power industry, submitting surveys to electricity producers, trading companies and distributors, as well as organisations representing the power industry and buyers of electricity, who were asked to present their views concerning threats that might arise out of the proposed concentration. This was followed by three rounds of additional questions to the companies that would participate in the concentration.
The competition authority found that the proposed concentration would involve common markets shared by both participants. Particularly crucial for the decision were the markets where the concentration would exert horizontal effects (i.e. joint product markets for the participants where their combined market share exceeds 20%). The decision identified five relevant markets of this type (based on substitutability of products and identity of the geographical areas):
  • the national market for production and sale of electricity
  • the national wholesale market for electricity
  • the national retail market for electricity
  • the national market for trading in green certificates (issued to producers of electricity from renewable sources)
  • the national market for system services provided by operators of distribution systems
The office found that the combined market share of PGE and Energa exceeds 40% on three of the relevant markets identified, namely the retail electricity market, the market for production and sale of electricity, and the market for trading in green certificates. It was found that the participants’ share in the latter two markets would slightly exceed the 40% threshold, but the increase in market power could not be regarded as significant.
The situation would be different in the case of the retail market for electricity, however. It was found there that the increase in PGE’s share of that market over 40% could not be regarded as insignificant. As a result of the concentration, among the four utility groups currently competing with one another (established pursuant to the government’s 2006 programme for the utility sector), as well as other major competitors, there would remain only the strongest (PGE + Energa) and two weaker groups (Tauron and Enea), in addition to two smaller companies (RWE Stoen, supplying Warsaw, and Vattenfall, supplying the major cities in Upper Silesia).
The president of the office also found that the proposed concentration would result in significant restriction of competition because of vertical ties (along the distribution chain) existing between PGE and Energa on three of the product markets identified above.
It appears, however, that the most important reason for issuance of a negative decision in this case was the issue of definition of the relevant markets in geographical terms, particularly with respect to the market for production and sale of electricity (the other markets being closely tied to this or representing different levels of sale of electricity). In the view of the competition authority, this market should be defined as the national market, and not more broadly (i.e. regional or European). In justification for this position, the president of the Office of Competition and Consumer Protection pointed to the low level of electricity imports into Poland (no greater than 2–3%) and the low transmission capacity of cross-border connections. In her opinion, there is also no justification for expecting that the relevant market for production and sale of electricity will expand in the immediate future (within at least the next five years, when the first new cross-border connections are to be put into operation) from the national market to the regional market.
In her analysis, the president of the office also raised the possibility of withdrawing the prohibition of the concentration under Art. 20(2) of the Act on Competition and Consumer Protection, which authorises the president to issue a decision permitting a transaction to go forward, despite a significant restriction of competition, when justified in extraordinary circumstances. Applying the “rule of reason” in such cases, the competition authority will examine specifically whether the given concentration will generate economic development or technological progress, or exert a beneficial effect on the national economy.
During the anti-monopoly proceeding the applicant argued that the planned concentration would increase the energy security of Poland, generate direct benefits for customers, and lead to technological and economic progress. The competition authority nonetheless found that the benefits flowing from the concentration between PGE and Energa would not balance out the restrictions on competition resulting from the concentration.
PGE has already announced that it does not agree with the decision issued by the president of the Office of Competition and Consumer Protection or the justification, and that it is preparing to appeal. An appeal from the decision should be filed with the Court of Competition and Consumer Protection (via the office that issued the decision) within 14 days from service of the decision.
Andrzej Madała, Competition Law Practice Group, Wardyński & Partners