Utilities Policy 9 2000 15–29 www.elsevier.comlocateutilpol
The electricity supply industry in Germany: market power or power of the market?
Gert Brunekreeft , Katja Keller
Institut fu¨r Verkehrswissenschaft, University of Freiburg, D-79085 Freiburg i.Br. Germany Received 29 February 2000; received in revised form 8 September 2000; accepted 28 November 2000
Abstract
This paper analyses the electricity supply industry in Germany, which was liberalized in April 1998. Noticeable aspects are the eligibility of all end-users, the lack of constraints on the vertical industry structure and the option for negotiated third party access.
There is no sector-specific regulation. This paper argues that the vertically integrated firms concentrate on excessive network access charges, whereas the stages generation and retail appear to be relatively competitive. Empirical evidence suggests that in Germany
network access charges make up a significantly higher share of end-user prices than in the UK, which is used as regulation- benchmark.
2001 Elsevier Science Ltd. All rights reserved.
JEL classification: L1; L43; L94
Keywords: Electricity; Competition; Market power; Deregulation
1. Introduction
The German government implemented the EU-directive for a common electricity market with the introduction of
the new Energy Act Energiewirtschaftsgesetz, EnWG on 29 April 1998. The intended competitive pressure engen-
dered by the new act seems to have shaken up the sector considerably. Whereas the sector had traditionally been
stabilized by an exemption from the general prohibition on cartels, it now seems that competition puts the firms
under substantial pressure. The electricity supply industry ESI takes a prominent place in the public discussion.
The nationwide firm EnBW entered the retail market for residential end-users with the phrase: “What’s the color of
power?”, the trade-mark of EnBW being “Yello”. This seems to have triggered consumers’ awareness of the
possibility to switch their power supplier. End-user prices have dropped quite dramatically and competition seems
tough, especially in generation.
In accordance with the options provided by the EU-
Corresponding author. Tel.: +
49-0761-2032373 fax: +
49-0761- 2032372. url: httpwww.vwl.uni-freiburg.defakultaetvwlehrstuhl.html.
E-mail addresses:
brunekrevwl.uni-freiburg.de G.
Brunekreeft, kakellervwl.uni-freiburg.de K. Keller.
0957-178701 - see front matter
2001 Elsevier Science Ltd. All rights reserved. PII: S 0 9 5 7 - 1 7 8 7 0 1 0 0 0 0 2 - 9
electricity-directive, the German government opted for Negotiated Third Party Access nTPA for the access
regime to the networks. Consequently, there is no sector- specific regulator, access charges are unregulated and the
details of network access have been left to the industry to work out. The control of anti-competitive behaviour is the
task of the antitrust agency and the courts. After 2 years of experience, empirical evidence suggests a pattern which
is in accordance with what was to be expected theoreti- cally. Since the network access charges are largely unregu-
lated, whereas non-discriminatory access is closely moni- tored by the antitrust agency, the network owners, which
are strongly vertically integrated in generation and retail, may be expected to make excess profits on the network,
and not in the complementary competitive production stages. Thus, relatively strong competition especially in
generation might indeed be expected, but at the expense of relatively high network access charges.
Underlying this argument is the Chicago-inspired theorem which may be called the “law of single mar-
ginalization”.
1
An unregulated input monopolist will
1
Compare especially Posner 1976 and Bork 1978; for an analysis of “double marginalization” cf. Spengler 1950. For a more
16 G. Brunekreeft, K. Keller Utilities Policy 9 2000 15–29
set a monopolistic input price and secure marginal-cost pricing at the complementary stage; in other words, it
will attempt to secure an as-if competitive outcome at the complementary stage if it can compensate via the
input price here, the access charge. Under certain conditions the input monopolist will be indifferent
between vertical integration into the complementary stage or vertical separation. In contrast, if the input
price is regulated sufficiently strongly, the input monopolist will have an incentive to attempt to lever
the market power of the input stage to the complemen- tary stage in order to make monopoly profits at the
complementary stage. In order to do so, it will have to foreclose and thereby exclude competitors from the
complementary stage.
The German option for nTPA contrasts sharply with the other EU member states. Effectively all others opted
for Regulated Third Party Access rTPA which implies a sector-specific regulator setting and controlling an
access regime. This allows an interesting comparison of different systems. Throughout, the United Kingdom will
be used as a comparator country.
2
The structure of the ESI in the UK is roughly comparable with the ESI in
Germany and regulation of the ESI in the UK provides a perfect counterexample of the situation in Germany.
The primary aim of this contribution is to analyse the newly liberalized ESI in Germany. The secondary aim
is to indicate empirically that network costs make up a relatively higher share of the electricity bill in Germany
than in the UK, which in turn implies that the relative share
of the
competitive components
especially generation is lower in Germany than in the UK. The
paper is organized as follows. Section 2 will describe the legal environment of the ESI in Germany, with special
attention to the so-called Association Agreement II VV II,
3
which arranges the network conditions. Section 3 characterizes the sector as a whole. In Section 4, price
developments are examined in detail, with the ultimate purpose of indicating the ratio of network access costs
as compared to the final electricity price. Section 5 offers some conclusions.
2. Institutional arrangements