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Regulating access to nuclear power plants through antitrust!

April 4th, 2008 by François Lévêque, Ecole des mines de Paris

France’s antitrust authority recently ordered the electric utility EdF to offer rivals on the deregulated small-consumer market access to installed capacity in nuclear power generation. An initial auction for allocating 500 MW took place in March. 1000 other MWs will be allocated in the remaining of the year. Did the authority’s decision go far enough? Or did it go too far?

Deregulation in France’s electricity sector is hampered by serious obstacles. Firstly, the horizontal and vertical integration of the incumbent monopoly was maintained. Upstream, EdF owns 88% of installed production capacity and the entire fleet of nuclear power plants in France. Downstream, EdF has the largest customer portfolio. In particular, the incumbent supplies two-thirds of the needs of small businesses. Secondly, France chose to keep the residential consumer market closed to competition and to prolong administered retail prices for as long as possible. Thirdly, the industry regulator has only limited powers. Lastly – and this explains the above – deregulation of the electricity sector does not have the support of any of the French political parties; they present it as a step backwards. In France, deregulating the energy sector has become synonymous with higher prices.

In this environment, the antitrust authority can be tempted to make its voice heard and give a helping hand to the labored development of competition in the domestic market. Such an opportunity happened in February 2007 when Direct Energie filed a complaint with the Conseil de la Concurrence. The alternative supplier accused EdF of squeezing the margin between retail and wholesale prices. 10 months later, a transaction was accepted by EdF and the antitrust authority. It provides for an undertaking in the form of a series of 3 auctions for a long-term supply contract for 500 MW each. The undertaking is divided into two periods. Over the next five years, EdF will supply power at a fixed price ranging from €36.80 per MWh in 2008 to €47.20 in 2012. For the subsequent ten-year period (2013-2022), deliveries will cover up to the same quantity of energy but the price will no longer be known in advance. Only the calculation method is fixed. It is the sum of four terms. Three terms reflect the cost of generating nuclear power at the new Evolutionary Power Reactor (EPR) (variable costs, operating costs, investment costs) and their evolution over time. The evolution will be based on pre-determined indices that will be used to update the amounts from one year to the next. The fourth term is the one on which the auction will hinge. It is therefore only known after the bids of the highest-bidding alternative operators have been processed.

EdF’s undertaking covers a total of 1,500 mW, which is equivalent to around 10 TWh of power. Small consumers that have opted for the deregulated market currently consume 8TWh. The volume of the undertaking is therefore higher. The difference between these two amounts may seem low given that the market is likely to grow over the next few years. However, we must remember that EdF currently supplies two-thirds of that market. The remainder, supplied by alternative operators, accounts for only around 3 TWh. The undertaking therefore covers more than three times their current needs. It enables them to achieve an annual growth rate of 10 percent over the next 15 years.

Relative to the total consumption of small consumers (approximately 180 TWh), this volume is clearly very small. However, in the antitrust authority’s view, the problem that the undertaking must remedy is limited to the deregulated market. The authority is concerned with supply to the deregulated market, not the regulated market. It says it did not “choose to impose obligations of various kinds on EdF whose common objective would be effectively to enable its rivals to compete with its offerings at regulated prices”. The authority stresses that EdF’s behavior on the regulated part of the market is not covered by the proceedings; and that the abolition of regulated prices is outside the scope of the case.

In other words, the authority rejects two extreme positions: that of the plaintiff, Direct Energie, which wants wholesale prices to be regulated in order to be able to compete with EdF on the regulated-price offering for small consumers; and that of third parties that want to abolish regulated retail prices. The authority’s decision therefore appears balanced.

We have a different view we explained at length in a recent academic paper (in French or in English). In a nutshell, two points are worth summarizing here. Firstly, we do regret that the authority has not been not more incisive with respect to the maintaining of administered electricity prices in France. It has no qualms about criticizing public policy in other (e.g., retail chains) for its pernicious effects on competition. As often emphasized, competition advocacy must be a mainstay of antitrust authorities’ work. Secondly, the antitrust authority’s decision can even be criticized for going too far. Its decision amounts to forcing EdF to open access to some of its assets to its competitors. As pointed out by Justice Scalia in Trinko that kind of intervention raises several dangers. The antitrust authority is called upon to act as a planner even though it has neither the level of specialization nor the knowledge of sector regulators and is therefore likely to make mistakes. Forced access is also likely to facilitate collusion, even though this is the absolute evil that the antitrust authority is supposed to be fighting. It also risks discouraging investment. If access is made a legal obligation, firms will stop investing either because they are relying on the others, or because they fear losing the exclusive use of their asset. Undoubtedly, the three dangers are present in the case at hand.

François Lévêque, professor of Law & Economics, Ecole des mines de Paris

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One Response to “Regulating access to nuclear power plants through antitrust!”

  1. Jon Stern Says:

    Very interesting. The French competition authorities seem in this case to be acting very much via the economics of the second (or third) best.

    The article takes a strong line against mandatory access requirements. I’m not so sure. There is a long history – and much discussion of this – for vertically integrated telecom companies. For them, and now for postal services, mandatory network access (typically at regulated prices) has become relatively normal and, in telecoms, BT has long had to offer wholesale products at regulated prices.

    In addition, it’s not clear that this always reduces investment. Martin Cave has put forward influential arguments about the ‘ladder of investment’ based on mandatory access plus local-loop unbundling. Moreover, at least outside the UK, incumbent telcos seem to prefer mandatory access to vertical separation.

    For electricity and gas, vertical separation is clearly, to my mind, the preferred policy. But, mandatory access may be a good step towards that if separation is ruled out for political or other reasons. Besides the pure economic arguments, it is a good institutional design stepping stone towards vertical separation. Not least, the problems that are revealed with mandatory access provide important impetus to wards moving to fuller separation. That route has clearly emerged in the UK in telecoms and in other network utilities.

    Jon Stern

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