VISEGRAD: A victory of sorts for CEZ in EU competition probe

By bne IntelliNews July 18, 2011

bne -

CEZ on Friday, July 15 was trumpeting being "fully cleared" of several serious accusations in an antitrust probe by the European Commission, giving investors hope the Czech utility is off the hook and will avoid a huge fine of about CZK18bn (€736m) and a possible break-up of its operations. Sources at the Commission and the utility's legion of critics, however, say the matter is not quite so straightforward.

First off, the Commission did indeed choose not to open formal investigations into suspicions that CEZ had manipulated prices on the Czech electricity market, engaged in cartel activities and limited the trade in brown coal. However, sources say this is not quite the same as the firm's statement that, "CEZ has been fully cleared of several serious accusations. Clear evidence has been discovered that CEZ has not and could not have manipulated with electricity prices, has not engaged in a cartel with anyone, nor has it been involved in limiting the trade with brown coal."

Sources say the Commission has been hindered in its investigation from the outset when in November 2009 competition officials raided the Prague offices of CEZ and two other firms involved in the power market, Energeticky a prumyslovy holding (EPH) and J&T Investment Advisors, only to be met by a scrum of local press who had obviously been tipped off. The Commission subsequently brought formal charges against EPH and J&T in December 2010, alleging that they diverted incoming emails, failed to open encrypted emails and failed to block access to an email account. Typically, officials ask for email accounts belonging to key personnel to be blocked during dawn raids so that electronic documents cannot be destroyed. Those charges are still outstanding.

Who leaked the information of the raids officially remains a mystery, though sources say that it did not come from inside the Czech domestic competition authority, but rather from inside the Commission itself. A person who was central to the Commission's internal probe has been since moved to another department; that person did not respond to requests from bne to discuss the matter.

Formal probe

While the Commission has decided not to formally open an investigation into those alleged abuses, it has opened a formal probe into CEZ over suspicions that the Czech Republic's largest power utility illegally hampered rivals from entering the domestic wholesale electricity market.

The Commission said it had concerns that CEZ may have hoarded capacity on the transmission network, abusing its dominant position and hindering rivals' entry into the local market. The Commission stressed that the opening of formal proceedings does not imply that it has proof of illegal activities, but merely means it will investigate the case as a matter of priority, with no legal deadline to complete those inquiries. It also reserves the right to broaden its inquiry into other areas.

CEZ, which owns three-quarters of the country's generating capacity, maintains its innocence, saying the investigation would prove that it has not committed any breach of competition laws. "CEZ believes that the continued investigation will prove that it has neither committed any breach of the applicable competition rules in this respect. The European Commission itself has stated that the initiation of its investigation procedure does not in any manner anticipate the outcome. Moreover, evidence has been found that numerous new operators have over the recent years entered the Czech power generation market and many rival projects have been implemented using the Czech power transmission grid," a CEZ statement said.

The key charge is centred on the way CEZ reserved in advance transmission capacities on the electricity grid, operated by Czech state-owned company CEPS in Pocerady, North Bohemia, for its new natural gas-fuelled plant, which will replace the existing coal-fired blocks once they reach the end of their service life. But some analysts say this appears a fairly weak charge. "CEZ doesn't own CEPS and it doesn't sound like they've enjoyed any superior rights of access to the grid," says Jan Tomanik of the Prague-based brokerage Wood & Co. "The likelihood of them being found in breach of any competition law is relatively low."

CEZ also insists the project is fully credible, arguing that the reserved capacity on the power grid was not in any way "speculative", but directly connected to the construction of the new plant, which it has since begun.

However, critics of CEZ, including the Prague-based advisory firm Candole Partners, which counts amongst its clients the utility's competitors, said the Commission's move vindicates its own conclusions that the relevant wholesale market for assessing CEZ's position is the Czech Republic. "The Commission's decision contradicts CEZ's long-held assertion that its relevant market is European. It explicitly refers to CEZ as the dominant market participant on the Czech wholesale market. If the relevant market was European, we would expect the Commission to dismiss the case on the grounds that other market participants are indifferent to where they build generation capacity," Candole says.

While CEZ could certainly take some comfort in the announcement, it was left in no doubt that this is not the end of the matter. Though some dismiss it as empty rhetoric, the Commission indulged in some sabre rattling at the end of its statement, saying it has brought to book some bigger energy firms than CEZ over the years. "This is not the first time that the Commission has had to deal with allegations of an abuse of dominant position in the energy sector. There have been many decisions in the gas and electricity sector in recent years, for example concerning E.On on the German electricity wholesale and balancing markets, EDF on the French retail market or the Swedish transmission system operator Svenska Kraftnät."

So, CEZ 2 - EC 1. Though it's a game of two halves and plenty to play for.

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